Income Tax Appellate Tribunal - Mumbai
Leela Lace Software Solutions P.Ltd, ... vs Assessee on 12 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER
AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER
ITA No. 8011/Mum/2011
(Assessment Year: 2007-08)
Leela Lace Software Solution (P.) Vs. ACIT - 8(2)
Ltd., Room No. 209,
Leela Baug, Sir M.V. Road, Aaykar Bhavan,
Andheri (E), M.K. Road,
Mumbai - 400 059 Mumbai 400 020
[PAN: AAACD 9926 D]
(Appellant) (Respondent)
Appellant by : Shri Nitesh Joshi
Respondent by : Shri Amardeep
Date of Hearing: 12.11.2012
Date of Pronouncement: 05.12.2012
ORDER
Per Sanjay Arora, AM:
This is an Appeal by the Assessee against the Order by the Commissioner of Income Tax (Appeals)-17, Mumbai ('CIT(A' for short)) dated 20.10.2011, confirming the levy of penalty by the Assessing Officer (AO) u/s. 271(1)(c) of the Income Tax Act, 1961 ('the Act' hereinafter) for the Assessment Year (A.Y.) 2007-08 vide his order dated 29.06.2010.
2.1 Opening the arguments for and on behalf of assessee, the ld. AR, its counsel, would submit that the instant case is covered by, inter alia, the order of the Tribunal in the case of ITO v/s. Jewelex International Pvt. Ltd., Mumbai (in ITA No. 3302/Mum/2009 dated 15/9/2010), wherein the tribunal deleted the penalty under 2 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) similar circumstances, placing a copy of the same on record. The assessee had set off interest received, which was only on margin money given for obtaining letters of the credit required for availing credit facilities for business, against interest paid, claiming deduction u/ss. 10A and 10B on the net income from its eligible undertakings. It is not a case of earning interest on surplus funds for the time being parked in investments. The Revenue, though segregated and assessed interest income (Rs.19,17,771), that stood set off, as business income, yet disallowed deduction u/ss. 10A & 10B on the same to the extent it relates to EOU and SEZ Units (Rs.14,27,547) on the ground that the same do not represent income of the eligible undertaking, relying on the decisions in the case of, among others, CIT v. Sterling Foods (1999) 237 ITR 579 (SC), Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC), CIT v. A. Srinivasa Pai, 242 ITR 29 (Ker.) and Shriram Honda Power Equipment 207 CTR (Del) 689. The tribunal in the case of ITO v. Jewelex International Pvt. Ltd. (supra) was of the view that even so, penalty u/s. 271(1)(c) of the Act could not be levied in view of section 10B(4), which provides that the income exigible to deduction under the said section is profits of the said business as further worked out on a proportionate basis, taking us through the relevant part of the order, which reads as under :
'5. We have carefully considered the facts and the rival contentions. There is no dispute that the interest was received from margin monies kept as deposits with the banks for the purpose of borrowing monies for the business. The assessee's business is in the export of jewellery and in the first page of the assessment order it has been stated by the Assessing Officer that the assessee is a 100% export oriented undertaking within the meaning of section 10B. If that is the factual position, the interest has to be considered as having been derived from the export of the articles. Even if it is argued that the immediate source of the interest is the deposits with the banks and not the export of articles, in view of sub-section (4) of section 10B the assessee is entitled to succeed. The Assessing Officer has not assessed the interest under the head "Income from other sources". He has treated the interest as part of the profits of the assessee's business. Sub-section (4) of section 10B statutorily prescribes a formula as to what should be considered as profits derived from export of articles. The profits of the business of the undertaking are to be ascertained first and the next step is to bifurcate the same in the same proportion as the export turnover in respect of the articles bears to the total turnover of the business carried on by the undertaking. If the interest income forms part of the profits of the business of the undertaking, then in the light of the statutory 3 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) formula the resultant figure after applying the formula has to be statutorily considered as profits derived from export of articles. In the present case the interest having been assessed as part of the profits of the business of the undertaking, the formula has to be applied and sub-section (4) leaves no choice. In this view of the matter we are in agreement with the submission of the learned counsel for the assessee.' The tribunal has in the said order also discussed the decisions in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC) and CIT vs. K. Ravindranathan Nair (2007) 295 ITR 228 (SC) and, further, stands followed by it (the tribunal) in the case of ITO vs. Greytrix (India) Pvt. Ltd. (in ITA No. 5787/Mum/2009 dated 07.10.2011/copy on record). In fact, in the case of Tropicate Textiles Pvt. Ltd. vs. Dy.
CIT (in ITA No. 1827/Mum/2006 dated 30.09.2011/copy on record), the interest income had been assessed as income from other sources, and which was held by the tribunal as assessable as income from business due to its nexus with the appellant's business, while in the instant case the AO had himself assessed it only as business income.
2.2 On being questioned by the Bench as to whether there is a finding in respect of the interest income as arising out of margin money kept with the bank toward various fund or non-fund based credit facilities availed there-from for its business, he stated that same was not in dispute, taking us to paras 5, 6 (page 3) of the assessment order. On further query as to whether section 10A also contains a provision similar to section 10B(4), the deduction for the year having been also claimed u/s. 10A, he drew our attention to section 10(A)(4), which was found to be identically worded in the relevant part, so that the two provisions are para materia. Finally, he would submit that the assessee should in any case get the benefit of doubt, in view of the provision sections 10(A)(4) & 10(B)(4), which read as under:
Section 10A (4) "(4) For the purposes of sub-section (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such 4 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) articles or things or computer software bears to the total turnover of the business carried on by the undertaking."
Section 10B (4) "(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export total turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking."
2.3 The ld. DR, on the other hand, would submit that the assessee having accepted its assessment disallowing deductions u/ss. 10A & 10B on the impugned interest income, there is no scope for discussing the merits of the same, which is only an accordance with the law, as explained in, among others, the decisions in the case of Liberty India (supra) and Sterling Foods (supra). Reference to the provisions of sections 10A(4) and 10B(4) would thus be of no moment. Further, the assessee had set off interest income against interest expenditure in an attempt to conceal the true particulars of its income and, in any case, has furnished inaccurate particulars thereof. The same was found only during the course of assessment proceedings u/s. 143(3). It is thus a clear case for levy of penalty u/s. 271(1)(c); the onus to prove its claims per its return of income and, in any case, to establish the bona fides of its claims, is only on the assessee, and toward which there is abundant reference in the orders by the authorities below to case law, as in the case of Atul Mohan Bindal v. CIT (2009) 317 ITR 1 (SC); Union of India v. Dharmendra Textile Processors & Others (2008) 306 ITR 277; K.P. Madhusudhanan vs. CIT (2001) 251 ITR 99 (SC); B.A. Balasubramaniam & Bros. Co. vs. CIT (1999) 236 ITR 977 (SC); and A. Srinivasa Pai (supra).
3. We have heard the parties, and perused the record.
3.1 The first thing that we would wish to clarify is that the impugned interest income (Rs. 14,27,547) stands assessed by the AO as income from other sources, and not as business income, before us by the ld. AR before us and, further, that this aspect has also not been disputed by the assessee in appeal. In this view of the matter, the 5 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) assessee's reliance on the decision in the case of Tropicate Textiles Pvt. Ltd. (supra), rendered by relying on the judgment in the case of CIT vs. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bom.), wherein interest on margin money had been held as assessable as business income on account of its close nexus with the appellant's business, may not be of much assistance. This is more so as the matter, in any case, it needs to be appreciated, is as to whether the said income is derived from the export by the assessee's eligible undertaking/s or not, which only qualifies for the deductions claimed; the word 'derived from' being restricted in scope, as explained by the apex court time and again per a series of decisions, so that the same ought to considered as well settled. In the case of Pandian Chemicals Ltd. (supra), the interest income was on deposit placed with the Electricity Board for supply of electricity, an essential input to the assessee's industrial undertaking. It was however held as not liable to be considered as derived from the said undertaking, but from the said 'deposit', which constitutes its primary and immediate source, contractually placed with the electricity department, as is the case with the bank in the instant case. This position stands again reiterated recently in the case of Liberty India (supra). The assessee's argument, seeking to draw mileage from the fact that impugned interest income stands to be assessed as business income, being only against margin money on guarantees or letters of credit, is thus of little consequence.
3.2 Further, it needs to be clarified that the non-indication per its return of income by the assessee that the said income stands imbedded in its (reduced) claim for interest expenditure on borrowings for its eligible undertakings, income for which is exigible to deduction u/ss. 10A & 10B, which stand duly claimed, does indeed amount to furnishing inaccurate particulars of income. There is no rule of accountancy or manner of presentation of accounts that subscribes to the netting of income against expenditure, which is ostensibly incurred or suffered for or in the process of earning income. The interest income therefore ought to have been exhibited separately and explicitly in accounts and, in any case, the return of income. Clearly, but for the return having been taken up under the verification procedure under the Act, and examination 6 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) of the relevant deduction by the AO, this fact itself would not have to light. This is particularly relevant and assumes significance in view of the income derived from the export by the eligible undertakings being claimed exempt, and the express pronouncements by the no less than the apex court, time and again, i.e., qua different incomes and in context of different beneficial provisions, on the scope and ambit of the word 'derived from' occurring therein. In fact, the issue of netting of interest income against interest expenditure has also received consideration by the higher courts, and only in the context of beneficial provisions; it being held that the same is acceptable only in the case of a direct nexus between the interest income and the interest expenditure, which is admittedly missing in the instant case, and toward which the ld. CIT(A) has referred to the decisions in the case of K. Ravindranathan Nair (supra) and Shriram Honda Power Equipments Ltd. (supra).
3.3 Finally, we take up the assessee's argument with reference to the provision of sections 10A(4) and 10B(4), reproduced hereinabove, on which basis only favor stood extended to the assessee-respondent in the case of ITO v. Jewelex International Pvt. Ltd. (supra). Though in our clear view the assessee should have, particularly given the clear and settled position of law in the matter per a host of judgments by the hon'ble apex court, clearly stated of its reliance on the language of sections 10A(4) & 10B(4) for claiming deduction on interest income there-under, establishing its bona fides, yet, it cannot be denied that the said provisions do inject an ambiguity in the matter inasmuch as the deduction u/s. 10A(1) and s.10B(1) of income derived from an eligible undertaking is subject to the provisions of the said sections and, thus, to sub- sections 10A(4) & 10B(4) respectively, which provide for the manner of working of the deduction under the said sections. The Revenue has not placed on record any decision by the apex court or by the hon'ble jurisdictional high court on the interpretation of the sections 10A(4) & 10B(4) in the context of income, which though not derived from export per se, yet forms a part of the business carried on by or through the eligible undertaking. There is, it needs to be borne in mind, no parallel provision to sub-sections 10A(4) & 10B(4) in section 80J, section 80HH, section 80I, 7 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) etc. under which the apex court has rendered its various judgments in the matter. An interpretation favoring inclusion of such interest income, i.e., as emanates directly from the conduct of the assessee's export business, for claim of deduction under the relevant sections, therefore, cannot be ruled out or ousted as unreasonable, and which would operate to save penalty. This is in view of the decisions by the apex court in the case of, among others, Vegetable Products Ltd. v. CIT (1973) 88 ITR 192 (SC) and Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC), which again represent the settled law in respect of levy of penalty.
3.4 With regard to the assessment of the impugned income as from other sources, as against from business, which is a prerequisite for it to be considered as exigible for deduction u/s. 10A(1) or s.10B(1), what is relevant and is to be seen is the assessee's return of income, per which the claim stands made, and not its treatment by the AO, which though not disputed by the assessee, would yet not detract from the merits of the assessee's explanation in having returned it only as business income and, further, as derived by its eligible undertaking, so as to be eligible for deduction u/s. 10A(1) or, as the case may be, s.10B(1), in view of ss. 10A(4) and 10B(4) respectively. The issue qua head of income under which the same is to assessed stands clarified by the hon'ble jurisdictional high court in the case of CIT vs. Indo Swiss Jewels Ltd. (supra), since followed by the tribunal in Tropicate Textiles Pvt. Ltd. (supra).
3.5 In view of the foregoing, the impugned penalty is liable to be deleted, and we direct so, also drawing support from the decisions in the case of ITO v. Jewelex International Pvt. Ltd. (supra) and ITO v. Greytrix (I) Pvt. Ltd. (supra). We decide accordingly.
4. In the result, the appeal by the assessee is allowed.
Order pronounced in the open Court on this 5th day of December, 2012 8 Leela Lace Software Solution P. Ltd. v. ACIT ITA No. 8011/Mum/2011 (A.Y. 2007-08) Sd/- Sd/-
(B.R. MITTAL) (SANJAY ARORA)
JUDICIAL MEMBER ACCOUTANT MEMBER
Mumbai, Date: 05/12/2012
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A)-17, Mumbai.
4) The CIT-V, Mumbai,
5) The D.R. "A" Bench, Mumbai. By Order
6) Copy to Guard File.
Asstt. Registrar
I.T.A.T., Mumbai
Rasika