Madras High Court
M/S. Arul Mariammal Textiles Limited vs The Assistant Commissioner Of Income ... on 7 August, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam, V.Bhavani Subbaroyan
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 07.08.2018 CORAM THE HONOURABLE Mr.JUSTICE T.S.SIVAGNANAM AND THE HONOURABLE Mrs.JUSTICE V.BHAVANI SUBBAROYAN T.C.A.No.909 of 2008 M/s. Arul Mariammal Textiles Limited, 26, Kamaraj Road, Mahalingapuram, Pollachi-2. .. Petitioner Vs The Assistant Commissioner of Income Tax, Coimbatore. .. Respondent * * * Prayer : Tax Case filed under Section 260A of the Income Tax Act, praying to set aside the order dated 04.01.2008 made in I.T.A.No.1221/Mds/2004, on the file of the Income Tax Appellate Tribunal, Chennai Bench D. * * * For Petitioner : Mr.B.Kumar, Senior Counsel for M/s.R.Loganathan and S.Ramachandran For Respondent : Mr.S.Rajesh for Mr.T.R.Senthil Kumar J U D G E M E N T
This appeal by the Assessee is directed against the order passed by the Income Tax Appellate Tribunal, Madras D Bench, in I.T.A.No.1221/Mds/2004, dated 04.01.2018 for the Assessment Year 1996-1997.
2. The Assessee filed return of income for the Assessment Year 1996-1997 claiming that in respect of two units, one situated at Pondicherry and another outside, a total interest income on the monies kept with the bank by way of margin money for taking foreign Letter of Credit by the Assessee to the tune of Rs.74,34,478/- is eligible to be claimed as deduction under Section 80IA of the Income Tax Act, 1961 (in short the Act). The assessment was completed under Section 143(3) read with Section 147 of the Act, wherein, the interest income was disallowed.
3. Against the said order, the Assessee preferred an appeal before the Commissioner of Income Tax, (Appeals) [in short, CIT-A], which was allowed by the CIT-A, by order dated 11.02.2004. Aggrieved by the same, the Revenue preferred an appeal before the Income Tax Appellate Tribunal (in short the Tribunal). The Tribunal vide order dated 17.03.2006 allowed the appeal filed by the Revenue holding that the income derived from eligible business of an undertaking alone was eligible for deduction and the interest income derived from an industrial undertaking is not eligible for deduction under Section 80IA of the Act. In so doing, the Tribunal relied on a decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Limited V. CIT, (2003) 262 ITR 0278. The Assessee did not appear before the Tribunal and the order was passed taking into consideration the submission of the Department's representative.
4. After the appeal filed by the Revenue was allowed by the order dated 17.03.2006, the Assessee filed a Miscellaneous Petition to recall the order. The Tribunal allowed Miscellaneous Petition and restored the matter for being heard and decided afresh. However, it appears that the Assessee did not co-operate for the disposal of the appeal and sought for adjournment, which, in the opinion of the Tribunal was a delaying tactic and accordingly, by the impugned order dated 04.01.2008, the Tribunal, while reiterating the decision taken in its order dated 17.03.2006, allowed the appeal.
5. The Tribunal held that the wordings of Section 80I and 80IA are identical and both the Sections use the expression any profits and gains derived from industrial undertaking". Therefore, the Tribunal held that the decision in Pandian Chemicals case squarely applies to the Assessee's case, where the interest has been earned from the bank deposits made for the purpose of margin money and accordingly, the appeal was allowed. Aggrieved by the same, the present appeal has been filed by the Assessee.
6. This appeal has been admitted on 09.07.2008 on the following substantial question of law :
1. Has not the Tribunal committed an error in blindly applying the ratio in Pandian Chemicals case, 262 ITR 278, of Supreme Court when the language employed in Section 80IA is much wider since it includes profits or gains derived from the business of an Industrial undertaking whereas the language in Section 80HH which was the subject matter of interpretation, the Pandian Chemical case merely stated profits and gains derived from an Industrial undertaking.
7. Mr.B.Kumar, learned Senior Counsel assisted by Mr.S.Ramachandran, learned counsel for the Assessee, submitted that the Assessee, for the purpose of manufacture of wind operated electricity generation, popularly called as wind mill, had imported some critical components from abroad, for which purpose, they had opened a foreign Letter of Credit through bank, for which, the bank had insisted upon margin money to be kept as a condition for availing the Letter of Credit facility. It is submitted that the interest earned on such margin money was claimed as deduction under Section 80IA of the Act on the ground that it is for the purpose of carrying on business as for manufacture of wind mill such Letter of Credit was essential, since the critical components could not be imported without the Letter of Credit. Thus, the Assessee claimed that opening the Letter of Credit is integrally connected with the business of the Assessee and therefore, the interest income, which is derived from the business of the industrial undertakings, namely, manufacturer of wind mill, would be entitled for deduction under Section 80IA of the Act.
7.1. Further, it is submitted that the Tribunal ought to have noted that Section 80IA of the Act provides for claiming the benefits which is much wider and that any profits derived from business undertaking is exempted. The Tribunal failed to note that the business is a compounding term and much larger than an industrial undertaking and business includes all facilities of an undertaking by which profits or gains are made. Further, it is submitted that the word business in Section 80IA would certainly go to enlarge the scope of deduction allowable in the said Section. Therefore, it is the contention of the learned Senior Counsel for the petitioner that margin money, which had been kept with the bank solely for business, qualifies for deduction. Furthermore, there is a direct nexus with the importation of the components from various suppliers outside India and the manufacture and sale of wind mill, opening of Letter of Credit and keeping margin money with the bank and no part of the above transactions can be curtailed from each other, when it is seen in relation to the business of the Assessee concerned.
7.2. The learned counsel referring to the decision in Pandian Chemicals pointed out as to how the said decision cannot be applied to the case of the Assessee, more particularly, when it is a case arising under Section 80HH of the Act.
7.3. Relying on the decision of the Bombay High Court in CIT V. Jagdishprasad M.Joshi, (2009) 318 ITR 420, it is submitted that the Court has distinguished the decision in the case of Pandian Chemicals, which would directly apply to the facts and circumstances of this case.
7.4. Reliance was placed on the Division Bench decision of this Court in the case of CIT V. T.T.G. Industries Limited, 2012 SCC OnLine Mad 1691, wherein, the Division Bench held that the service charges for maintenance, charges for transportation, erection and commission charges, labour charges, sale of scraps during manufacturing would be included as profits and gains of the industrial undertaking and qualified for deduction under section 80IA of the Act.
7.5. Reliance was also placed on the decision of the High Court of Delhi in Priviera Home Furnishing V. Additional Commissioner of Income Tax, (2016) 237 Taxman 0520 (Delhi), wherein, it was held that the interest on fixed deposit receipts, which were received on margin kept in the bank for utilization of Letter of Credit and bank guarantee itself would form part of the business income of eligible undertaking of the Assessee and the same could be excluded from the eligible profits for the purpose of computing deduction under section 10B of the Act.
7.6. Reliance was placed on the decision of High Court of Gujarat in the case CIT V. Shah Alloys Limited, (2017) 396 ITR 0711 (Guj), which was rendered taking into consideration the decision in the case of CIT V. Karnal Co-operative Sugar Mills Ltd., 2000 (9) SCC 493, wherein, it is held that the deposit made by the petitioner for the purpose of opening a foreign Letter of Credit in the bank is directly linked with the profits or gains derived from the business of the industrial undertaking and would qualify for deduction under Section 80IA of the Act.
7.7. Reliance was placed on the decision of the Hon'ble Apex Court in CIT V. Shree Rama Multi Tech Limited, 2018 SCC Online SC 433, which had been rendered following the decision of the Apex Court in Karnal Co-operative Sugar Mills Ltd., 2000 (9) SCC 493 and CIT V. Bokaro Steel Limited, (1999) 236 ITR 315 (SC).
7.8. Reliance was also placed on the decision of High Court of Delhi in the case of CIT V Jaypee DSC Ventures Limited, CDJ 2011 DHC 308, which also pertains to furnishing of a performance bank guarantee in favour of the National Highways Authority of India, wherein, the Court held that the Assessee has not made deposit of surplus money lying idle with it in order to earn interest ; on the contrary, the amount of interest was earned form fixed deposit which was kept in the bank for furnishing the bank guarantee.
7.9. On the above submissions, the learned counsel prayed for answering the substantial question of law framed for consideration, in favour of the Assessee.
8. Mr.S.Rajesh, learned Junior Standing counsel appearing for the Revenue, referred to the scheme of Section 80IA of the Act and pointed out that what is important to note is that the profits and gains should be derived by an undertaking or an enterprise from any business referred to in Sub-Section (4) of Section 80IA and such business being referred to as eligible business and subject to the provisions of the section, which allowed in computing the total income of the Assessee to deduction of an amount equal to 100% of the profits and gains derived form such business. It is submitted that what is important to note in the said section is it should be from an eligible business, which has been enumerated in Sub-section (4) of Section 80IA of the Act. Thus, if the profit is derived from eligible business, it would qualify for deduction under section 80IA of the Act.
8.1. The learned counsel referred to the decision of the Hon'ble Supreme Court in Liberty India V. CIT, (2009) 183 Taxmann 349 (SC) and submitted that the wordings derived from is narrower in connotation as compared to the words attributable to and therefore, the deposit made by the Assessee and the interest earned therein will not qualify for deduction.
8.2. Heavy reliance was placed on the decision of the High Court of Himachal Pradesh in Himachal Futuristic Communication Ltd. V. CIT, (2014) 42 taxmann.com 179 (HP). It is submitted that the Court, following the decision in the case of Liberty India answered the question, which was more or less identical to that of the Assessee's case, in favour of the Revenue.
8.3. Reliance was placed on the decision of the Division Bench of this Court in the case of Gerard Perira V. ITO, (2016) 389 ITR 547 (Mad), wherein, the Court held that the interest income earned on deposit made by the Assessee for availing credit facility was not deductable as it was income earned from other sources.
8.4. Reliance was placed on the decision of the Division Bench of this Court in the case of CIT V. Menon Impex P. Ltd., (2003) 259 ITR 403 (Mad), wherein, it was held that the mere fact that the deposit was made for the purpose of obtaining a Letters of Credit, which were in turn, used for the purpose of doing business of the industrial undertaking did not establish a direct nexus between the interest and the industrial undertaking and therefore, the Assessee was not entitled to get the benefit of Section 10A of the Act in relation to the interest.
8.5. The learned Counsel by placing reliance on the decision of the Supreme Court in CIT V. Sterling Foods, 1999 (4) SCC 98 submitted that the sources of income should be from the industrial undertaking which is not the case of the Assessee. Further, with regard to the decision in Pandian Chemicals, it is submitted that though the decision arouse out of a case under Section 80HH of the Act, it will apply to cases of Section 80IA also, more particularly, in the light of the decision of the Hon'ble Supreme Court in Liberty India (supra).
8.6. Learned counsel also relied upon the decision of the Division Bench of this Court in the case of Cyber Pearl IT Park P. Ltd. V. ITO, (2017) 399 ITR 310 (Mad), and submitted that the term derived is critical in appreciating the kind of deduction, which would fall within the ambit of Section 80IAB. In the said case, the Court held that the expression derived is used as against attributable to, the width and amplitude is narrower and therefore, the Courts have held that in order to come to a conclusion as to whether such profits or gains, i.e., income would be amenable to deduction, the effective source of income is to be looked at and once, it is found that the income is derived from a secondary source, which is not the effective source, it falls outside the purview of such like provision, which provides for deduction with purpose of giving fillip to designated activity, which, in the said case, is the business of developing a Special Economic Zone.
8.7. On the submissions, learned counsel sought to sustain the impugned order passed by the Tribunal.
9. Heard the learned counsel for the parties and perused the materials placed on record.
10. As may be seen from the impugned order passed by the Tribunal, the Tribunal reiterated its earlier order dated 17.03.2006, wherein, the Revenue's appeal was allowed and even at that stage, the Assessee did not appear before the Tribunal. The Tribunal followed the decision in Pandian Chemical's case and held that the Assessee is not entitled for deduction under Section 80 IA of the Act. The application filed by the Assessee to recall the said order was allowed and the Tribunal afforded one more opportunity to the Assessee. Nevertheless, the Assessee appeared before the Tribunal and sought for adjournment, which in the opinion of the Tribunal was a delaying tactics and accordingly, it reiterated its order dated 17.03.2006 and held that the interest earned from bank deposit for the purpose of margin money do not qualify for deduction. In other words, it is held that Pandian Chemical's case will hold the field and accordingly, allowed the Revenue's appeal.
11. Thus, we are first required to examine as to whether the decision in Pandian Chemical's case would apply to the facts and circumstances of the case. In preceding paragraphs, we have referred to the factual position of the Assessee's case. The margin money by way of fixed deposit was available with the Assessee's bankers so as to enable the Bank to open a Foreign Letter of Credit, which was essential for the purpose of import of critical components for the purpose of manufacture of the wind mill for generation of electricity.
12. Firstly, we note that the case of Pandian Chemical's arose out of a claim under Section 80HH of the Act. The Assessee therein had made deposits with the Tamil Nadu Electricity Board, which had earned interest. The question arose was whether interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived on the part of the industrial undertaking for the purpose of Section 80HH of the Act ?
13. The Supreme Court referred to the decision of the Privy Council in the case of CIT V. Raja Bahadu Kamakhaya Narayan Singh, (1948) 16 ITR 325 (PC), and held that the although electricity may be required for the purposes of an industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking and the derivation of profits on deposits made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself.
14. Firstly, we note that Section 80I, 80IA and 80IB have a common scheme and from the reading of those Sections it is clear that the said sections provide for incentive in the form of deduction(s), which are linked to the profits and not to investment, whereas, in the other provisions, namely, Sections 80H, 80HH, 80HHA, 80HHB, 80 HHBA and 80HHC, the scheme is different. In fact, this distinction was noticed by a Division Bench of the Kerala High Court in K.Ravindranathan Nair V. DCIT, (2003) 262 ITR 669 (Ker), wherein, the Court, while considering the decision of the Hon'ble Apex Court in Karnal Co-operative Sugar Mills Limited, pointed out that the said decision was not rendered in the context of all the provisions of Section 80HHC of the Act, as the decision in Karnal Co-operative Sugar Mills Limited followed the decision in the case of CIT V. Bokaro Steels Limited, (1999) 236 ITR 315 (SC). In Karnal Co-operative Sugar Mills Limited, the deposit of money was directly linked with the purchase of plant and machinery and therefore, it was held that any income earned on such deposit was incidental to the acquisition of assets for the setting up of plant and machinery. Therefore, in our view, the Tribunal committed an error in allowing the Revenue's appeal by merely placing reliance on the decision in the case of Pandian Chemical's, which arose out of a case under Section 80HH of the Act and this error committed by the Tribunal goes to the root of the matter affecting the very correctness of the order passed by the Tribunal.
15. In the case of CIT V. M/s.T.T.G. Industries Limited, 2012 SCC Online 1691, the question arose was whether the service charges for maintenance, charges for transportation, etc., to be included as profits and gains of an industrial undertaking for the purpose of computation of deduction under Section 80IA of the Act. The Court, after taking note of the decision in the case of Liberty India, pointed out that Section 80IA/80IB of the Act, has a common scheme and a reading of Section 80IA makes it clear that the only requirement for the applicability is deriving of income by an undertaking or an enterprise from any business referred to in sub section (4) and thus, any profits and gains derived from an industrial undertaking from any business would qualify for deduction under Section 80IA of the Act. In our view, the decision rendered in the case of T.T.G. Industries Limited would squarely apply to the case on hand.
16. In the case of Priviera Home Furnishing V. Additional CIT, (2016) 237 Taxmann 520 (Delhi), the Assessee has stated that the interest on Fixed Deposit Receipts was received as margin money kept in the bank for utilization of Letter of Credit and Bank Guarantee limits and the Court held that the decision of the Tribunal that such interest bears the requisite characteristic of business income and has nexus to the business activities of the assessee cannot be faulted with. This decision also supports the case of the Assessee.
17. Equally, the decision in the case of CIT V. Shah Alloys Limited, (2017) 396 ITR 0711 (Guj), where, the Assessee had deposited money to open a Letter of Credit for the purchase of the machinery required for setting up its plant in terms of the agreement with the supplier and the money so deposited earned some interest, which was claimed as deduction. The Court held that it is not the case, where, any surplus share capital money, which is lying idle has been deposited in the bank for the purpose of earning interest and the deposit of money is directly linked with the purchase of plant and machinery. Accordingly, the Court answered the question in favour of the Assessee.
18. In the case of CIT V. Shree Rama Multi Tech Limited, 2018 SCC Online SC 433, the Court, after taking note of various decisions including that of Bokaro Steel Limited and Karnal Co-operative Sugar Mills Limited, held as follows :
12. The common rationale that is followed in all these judgement is that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the responsibilities was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be set-off against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue.
19. In the above referred decision, the Court analysed the purpose of deposit and held that it was not for some additional income, but to comply with the statutory requirements and the interest accrued on such deposit is merely incidental. In our considered view, this will be the right test to be applied to the case on hand and essentially, the answer to the substantial question should be in favour of the Assessee.
20. In the case of CIT V. Jaypee DSC Ventures Ltd., CDJ 2011 DHC 308, the Court held that the deposit made by the Assessee was not the surplus money lying idle with it to earn interest, but it was the amount of interest earned from fixed deposit, which was kept in the bank for the purpose of furnishing the Bank Guarantee. In our view, this decision also will enure in favour of the Assessee.
21. Equally is the decision in the case of CIT V. Paramount Premises (P) Ltd., (1991) 190 ITR 259 (Bom), wherein, analysing the purpose, for which, the deposits were made by the Assessee and the interest earned thereon, the Bombay High Court affirmed the view of the Tribunal to the effect that the entire interest earned from the business activity of the Assessee and did not arise out of any independent activity.
22. The sheet-anchor of the submission of the learned counsel for the Revenue is based on the decision of the High Court of Himachal Pradesh in Himachal Futuristic Communication Ltd. V. CIT, (2014) 42 taxmann.com 179 (HP). Firstly, we may point out that there were two types of transactions, one by way of margin money for the purpose of purchase of raw material and the other by furnishing Bank Guarantee for due performance of the contract of sale to manufacture of goods. The question arose as to whether the same cannot be treated as income derived from the business, as such. The Court referred to the decision of the Apex Court in Liberty India (supra) and culled out the legal principle evolved therein stating that the profit must be generated from the business activity or operational profits. No more or no less. In fact, in paragraph 4 of the decision, the Court pointed out that the interpretation of Section 80HHC of the Act was entirely different, as it was a self-contained Code by itself. However, so far as the facts of the said case are concerned, the Court held that the expenditure incurred cannot be treated as a first source of income, which is the quintessence for attracting the benefit and incentive provided under Section 80IA of the Act. It was found that the monies, which were given by the Assessee, were towards performance guarantee and certain margin money for purchasing raw material. The Court, however, has not elaborated upon the facts of the decision of the Hon'ble Apex Court in Karnal Co-operative Sugar Mills Limited (supra) and Bokaro Steel Limited (supra) and on facts, we find that the said decision of the High Court of Himachal Pradesh cannot be applied to the facts and circumstances of the case on hand.
23. So far as the decision in the case of Liberty India (supra) is concerned, the same would not apply to the facts of present case, because the said decision arouse out of a drawback incentive, which was on account of a scheme framed by the Central Government and the Court held that the incentive profits are not profits derived from eligible business under Section 80IB of the Act and they belong to the category of ancillary profits of such undertakings. Therefore, on facts, learned counsel for the Revenue cannot place reliance on the case of Liberty India (supra) to deny the benefit to the Assessee.
24. So far as the decision in the case of Cyber Pearl IT Park Limited, the Court, after taking into consideration various decisions, pointed out that in order to come to a conclusion as to whether such profits or gains, that is, income would be amenable to deduction, the effective source of income is to be looked at. Thus, essential factual matrix needs to be looked to arrive at a conclusion as to the effective source from which such income earned and if it is found that it is derived from secondary source, it is not the effective source, which falls outside the purview of such like provision, which provides for deduction.
25. In the instant case, the requirement of the Assessee to furnish the fixed deposit was a pre-condition to enable the Assessee to open a foreign Letter of Credit for the purpose of import of critical components for the manufacture of wind mill. This incidentally had earned some interest. As pointed out by the Hon'ble Supreme Court in Shree Rama Multi Tech Limited, it is not the Assessee's surplus money, which was deposited by way of fixed deposit, which had earned interest ; on the contrary, it was a pre-condition for the purchaser/Assessee to enable him to import the critical component for the purpose of manufacturing. Furthermore, it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of the Revenue that the amount, which was deposited in fixed deposit was a surplus money, which was lying idle in the hands of the Assessee. Therefore, whatever income accrued is merely incidental and not the prime purpose of doing the act in question, which resulted into accural of some additional income and therefore, the said income is not liable to be assesseed and is eligible to be claimed as deduction.
26. Thus, for the above reasons, we are of the clear view that the Assessee is entitled to deduction and the Tribunal erred in applying the decision of the Pandian Chemicals, which is distinguishable, for the reasons set out by us above.
27. In the result, the appeal is allowed and the order passed by the Tribunal is set aside and the substantial question of law framed is answered in favour of the Assessee and against the Revenue.
(T.S.S., J.) (V.B.S., J.)
07.08.2018
Index : Yes / No
Internet : Yes
gg
To
Income Tax Appellate Tribunal, Chennai Bench D.
The Assistant Commissioner of Income Tax,
Coimbatore.
T.S.SIVAGNANAM, J.
AND
V.BHAVANI SUBBAROYAN, J.
dua/gg
T.C.A.No.909 of 2008
07.08.2018