Income Tax Appellate Tribunal - Lucknow
Leatherage vs Income Tax Officer on 31 July, 2002
Equivalent citations: [2003]86ITD482(LUCK), (2003)78TTJ(LUCK)937
ORDER
P.N. Parashar, J.M.
1. These are two appeals filed by the same assessee against two different orders of learned CIT(A),both dt. 21st Dec., 2001, for the asst. yrs. 1994-95 and 1995-96. Since common issues are involved in these two appeals and further since the learned CIT(A) has also passed a detailed order in appeal for the asst. yr. 1994-95 and has followed the same in the subsequent assessment year, for the sake of convenience, these two appeals are being decided together.
2. Shri P.S. Bhargava, advocate, appeared on behalf of the assessee whereas Shri Prasenjit Singh, learned Senior Departmental Representative, represented the Department.
ITA No. 53/Luck/20013. The assessee has taken as many as five grounds in this appeal, out of which, ground No. 5 is of general nature.
Ground No. 14. This ground runs as under:
"Because the appellant being a 100 per cent export-oriented unit, having no inland turnover or income, could not be assessed to any income tax in view of the provision of Section 80HHC(1) r/w Section 80HHC(3)(a) of the IT Act."
5. Shri P.S. Bhargava, learned counsel for the assessee, submitted that in view of the provisions contained under Section 80HHC(3)(a), the assessee is entitled to exemption on the profit derived by it from the export business. The learned counsel, in this regard, placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom). He further submitted that the learned CIT(A) has although referred to this decision in para 14 of his order, but he has not discussed it in his findings.
6. On the other hand, the learned Senior Departmental Representative submitted that the assessee was following mixed system of accounting and, therefore, the AO has the duty to examine the nature of accounts maintained by the assessee. According to him interest income could not be treated as business income and, therefore, the AO was fully justified in treating it separately from income from export activity. He supported the order of learned CIT(A) and also placed reliance on the decision in CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC).
7. We have carefully considered the entire material on record and the rival submissions. The learned CIT(A) has considered the issue in paras 14 to 17 of his order and has recorded his findings in para 16 which are as under:
"I have considered the facts of the case as well as the arguments of the appellant. Coming to the first issue that has to be decided is as to what was the correct nature of the income earned by the appellant. In the case of Tutikorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 2271TR 172 (SC), the Hon'ble Supreme Court of India has held that in the case of a business if any income is derived by way of interest on FDRS. the same would constitute income from other sources and it cannot be treated as business income. Subsequently, the Madras High Court has followed the above decision in the case of South India Shipping v. CYT (1999) 240 ITR 24 (Mad) and reaffirmed that interest on FOR derived by a businessman can only be considered to be income from other sources. Moreover, in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), the Hon'ble Supreme Court of India has laid down the principle that while deciding the head of income under which a receipt has to be considered, it is the proximate source of such receipt which has to be considered. In the present case, the proximate or immediate source is interest on FDRs which is clearly in the nature of income from other sources and not income from business. In these circumstances, I am of the view that the AO has correctly treated the income under consideration to be income from other sources."
8. On facts, it is not disputed that the assessee was a 100 per cent exporter and was doing export business only and was earning income from such business. The provisions contained under Section 80HHC(1) and (3)(a) dealing with profits derived from export are as under:
"80HHC Deduction in respect of profits retained for export business.--(I) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee a deduction to the extent of profits, referred to in Sub-section (1B) derived by the assessee from the export of such goods or merchandise:
(3) For the purpose of Sub-section (1),--
(a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee."
9. In view of the above quoted provisions, the contention of the learned counsel was that the assessee is entitled for exemption on the profits earned from export business. This contention was also supported by making reference to the decision in the case of Punit Commercial Ltd. (supra). In that case the assessee was a 100 per cent exporter. It had credited in the P&L a/c interest income while working out the deduction under Section 80HHC, by considering these amounts as part of the business profit. The AO held that interest income cannot be treated as profit relating to business of exports and, accordingly, while working out the business profits for the purposes of Section 80HHC, he reduced the interest income from the business profit. The AO held that the deduction under Section 80HHC was meant for the assessees who earn the profits from exports and any business profits other than from export activity, was not entitled for deduction under Section 80HHC. Being aggrieved, the assessee filed an appeal to the CIT(A). Both the first appellate authority and the Tribunal found, on the facts, that the assessee was a 100 per cent exporter, that, Section 80HHC (3)(a) was applicable to the facts of the case and, therefore, the AO erred in deducting the interest income from the business profits of the assessee. Being aggrieved by the decision of the Tribunal, the Department preferred appeal under Section 260A of IT Act.
10. It was argued, on behalf of the Department, that the interest income cannot be treated as profit relating to exports. It was also contended that for the purposes of Section 80HHC(3)(a), the business profits were required to be worked out. It was contended that deduction under Section 80HHC(3)(a) would not apply to the case of the assessee to the extent of interest income as such income did not accrue on account of any export activity and further, any business profit from an activity which was not an export activity, was not eligible for deduction under Section 80HHC.
11. The Hon'ble Court, after considering the entire material, dismissed the appeal of the Department and held that the entire profits including the interest income was entitled for deduction under Section 80HHC(3)(a) of IT Act, 1961. A relevant part of the observation of the Hon'ble Court is being extracted below:
"Held, that, in the instant case, Section 80HHC(3)(a) of the IT Act, 1961, was applicable as the assessee is a 100 per cent exporter. Hence, the entire business income was deemed to be profit derived from export of goods. Therefore, the interest income could only fall under "business income". Section 80HHC(3)(a) deals with a 100 per cent exporter. Hence, the entire profits are entitled to deduction. This would include interest income also."
12. The learned CIT(A) has although cited this case referred to by the assessee before him, but has not made any reference to this case in his order and thus the contention of the learned counsel for the assessee that the learned CIT(A) erred in not making any reference to the decision relied upon by the assessee, appears to be correct.
13. A perusal of the order of the learned CIT(A) further goes to show that he has placed reliance on the decision in the case of Tutikorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 YTR 172 (SC) and the other case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC).
14. It may be pointed out that in the case of Tutikorin Alkali Chemicals & Fertilisers Ltd. v. CIT (supra), the assessee had surplus funds in his hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. Interest thus earned was of revenue nature. In that context it was held that merely because the interest income was utilized to repay the interest on the loan taken by the assessee, it did not cease to be his income. The Hon'ble Court has further held that after borrowed capital is used for purposes of earning income that income will have to be taxed in accordance with law.
15. In the case of CIT v. Sterling Foods (supra), the assessee earned income from import entitlements granted by the Central Government under an export promotion scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. It sold the import entitlements that it had earned to others. Its total income for the asst. yr. 1979-80 included the sale proceeds for such import entitlements and it claimed relief under Section 80HH of the IT Act, 1961, in respect of the sale proceeds of the import entitlements. The Tribunal held that the relief could not be granted. The Division Bench of Hon'ble Court decided the issue in favour of the assessee. The Hon'ble Supreme Court of India, on further appeal, held that the provisions of Section 28 of IT Act as amended, made no difference. According to the Hon'ble Supreme Court of India, for the application of the words "derived from" there must be a direct nexus between the profits and gains and the industrial undertaking. In that case the Hon'ble Court held that the nexus was not direct, but only incidental. According to the Hon'ble Court, the sale consideration from the import entitlements could not be held to constitute a profit and gain derived from the assessee's industrial undertaking and, therefore, the receipt 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 IT Act, 1961.
16. It may be pointed that on facts these decisions are not applicable to the present case. On the other hand, the decision of the Hon'ble Bombay High Court in the case of Punit Commercial Ltd. (supra) is directly applicable. It may further be pointed that in the case of Suhag Traders (P) Ltd v. ITO 89 ITD 287 [sic-(1996) 89 Taxman 287 (Del)(Mag)) also, an identical issue was involved. According to the Tribunal Bench D, Delhi, the assessee's claim for deduction of the amount of interest on FDRs which were set off against interest and other charges payable to bank was eligible for deduction under Section 80HHC. In this regard, the observations of the Bench are being reproduced below:
"Interest on FDR was rightly set off against interest and other charges payable to the bank. The CIT(A) had held interest received from the bank as business receipt and this finding had become final. The entire income of the assessee was derived from export and had to be computed after allowing the interest paid to the bank. The assessee's case in these circumstances fell under Clause (a) of Section 80HHC(3)."
17. The issue was also considered by the Nagpur Bench of Hon'ble Bombay High Court in the case of CIT v. Nagpur Engineering Co. Ltd. (2000) 245 TTR 806 (Bom) and it was held that interest on fixed deposits is eligible profits for computation of deduction under Sections 80HHC and 80-1 The SLP filed against the decision of the Hon'ble Bombay High Court in this case has been dismissed by the Hon'ble Supreme Court of India and thus this decision has become final.
18. In view of the above, we are unable to uphold the findings of the learned CIT(A) affirming the view taken by the AO and treating the interest income of FDRs liable to tax as income from other sources.
19. This ground is, therefore, allowed in favour of the assessee.
Ground No. 220. This ground runs as under:
"Because the action taken under Section 147 by the learned AO and upheld by the learned appellate authority is arbitrary, against the facts and law and completely liquidates or annihilates the concept of mixed method of accounting as enunciated in Section 145 of IT Act."
21. Before us, Shri P.S. Bhargava, learned counsel for the assessee, submitted that in the instant case, the reassessment proceedings were initiated on the basis of audit report. According to the learned counsel, all the details were fully disclosed by the assessee and there was no concealment on its part. It was further submitted that the AO has not correctly appreciated the decision of the Hon'ble Supreme Court of India in the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC). It was contended by him that the assessee was following the same system of accounting i.e., mixed system, in which export incentive and interest were being accounted for on cash basis, whereas business income was being accounted for on mercantile basis. The learned counsel for the assessee, therefore, submitted that there was no justification on the part of the AO and the learned CIT(A) to reopen the assessment proceedings under Section 147 of IT Act, 1961, merely on the basis of change of opinion. In this regard, heavy reliance was placed by him on the recent Full Bench decision of Hon'ble Delhi High Court in the case of CIT v. Kalvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB).
22. On the other hand, the learned Senior Departmental Representative supported the order of learned CIT(A).
23. We have considered the facts and circumstances relating to this issue and the rival submissions. A perusal of the assessment order shows that the assessee had not shown interest income on FDRs and, therefore, a notice under Section 148 was issued. On perusal of the assessment order, it is further found that the submission of the assessee before the AO was that the FDRs were secured against the loan taken by the assessee (secured overdraft) and also against shipping loan and net difference between interest accrued in FDRs and net interest charged on SOD limit and shipping limit, was debited and, therefore, there was no income from the FDRs. On this basis, the assessee had raised objection against initiation of proceedings under Sections 147 and 148 by the AO. However, the AO rejected the version of the assessee by holding that interest income on FDRs was liable to be taxed.
24. The order of the AO was challenged by the assessee before the learned CIT(A) and it was submitted that since objection on the part of the assessee was legally justified, no notice under Section 148 could have been issued. The learned CIT(A) considered the arguments of the assessee and rejected the same by observing as under;
"I have considered the facts of the case as well as the arguments of the appellant. I would like to point out that the basis on which the assessment can be reopened as per the provisions of Section 147 has undergone a dramatic change w.e.f. 1st April, 1989, and now the AO can it (sic) he has reason to believe that any income chargeable to tax has escaped the assessment for any assessment year be might assess or reassess such income by invoking the provisions of Section 147. Such power can be invoked even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. Thus the words "escaped assessment", where the return is filed, cover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based complete disclosure of all 'relevant facts upon which a correct assessment could have been based--Prafull Chuni Lal Patel v. M.J. Makwana, Asstt. CIT (1999) 236 ITR 832 (Guj). In the present case, it has to be seen that no assessment order had been passed in the sense that it is commonly understood and the return had only been processed as per the provisions of Section 143(1)(a). Therefore, in these circumstances, if the AO had a reasonable belief that certain income chargeable to tax had escaped assessment, he could have initiated proceedings under Section 147. In the present case, it appears that there was material to suggest that the amount of interest income credited to the P&L a/c had been grossly suppressed. Thus, it is clear that such an act on the part of the appellant would amount to necessary "reason to believe in order" to enable the AO to initiate proceedings under Section 147. Moreover, in any case, the appellant was at liberty to produce the correct facts before the AO so as to enable him to determine the correct income and it was not at all necessary that the issue of notice under Section 148 would automatically result in additions being made to his income. Additionally, during the course of appeal, the appellant was asked to explain as to what was the basis for disclosing receipt of income by way of interest as well as claiming deduction on account of payment of interest. It was explained by him that although payment of interest accounted on mercantile basis, income by way of interest was accounted for only on cash basis. I find that the Hon'ble Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT (1990) 182 ITR 1 (Mad) has held that the same basis has to be adopted for receipt and payment of interest and an assessee cannot be permitted to adopt mercantile basis for the payment of interest by it and claim the benefit of the cash system in respect of interest receivable. It is very clear, therefore, that according to the law as it stand, the appellant was required to account for receipt of interest on mercantile basis instead of cash basis as has been done by him. In this view of the matter, even if the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) is considered as being applicable to the case of the appellant, the fact remains that what has been pointed out by the audit party is the correct position of law as it stood at that point of time and not a mere opinion as was the case in the decision cited by the appellant. In this view of the matter, I agree with the AO that the proceedings under Section 147 have been correctly initiated. This ground of appeal is, therefore, dismissed."
25. Against these observations of the learned CIT(A), the contention of the learned counsel for the assessee, Shri P.S. Bhargava was that the learned CIT(A) has not properly considered the decision of the Hon'ble Supreme Court of India in the case of Indian & Eastern Newspaper Society (supra). His specific plea was that there was no justification for reopening the assessment merely on the basis of change of opinion. The learned counsel also contended that in view of the decision of Hon'ble Delhi High Court in the case of CIT v. Kalvinator of India Ltd. (supra), the controversy has been set at rest.
26. The learned Senior Departmental Representative, on the other hand, laid emphasis on the amended provisions of Section 147 of IT Act which became effective from 1st April, 1989. According to him the decision of Hon'ble Supreme Court of India in the case of Indian & Eastern Newspaper Society (supra) is not applicable to the present case.
27. On perusal of the orders of the Departmental authorities, it appears that the initiation of reassessment proceedings was made on the basis of audit report which is in the nature of an opinion. It may be pointed out that this report was filed by the assessee itself with the return. The assessee had disclosed all the details of his income including the income from FDRs. Therefore, it cannot be said that the assessee had not disclosed material particulars of his income or concealed any item of his income.
28. Before the AO, the specific submission of the assessee was that action under Section 147 could not be taken on the basis of audit objection only, particularly when there was no material before the AO to form a belief that the income of the assessee or any part thereof has escaped assessment and on this basis it is stated that initiation of reassessment proceedings is based on mere change of opinion.
29. The justification for reopening an assessment on the basis of audit report was considered by the Hon'ble Supreme Court of India in the case of Indian & Eastern Newspaper Society. In the case of Indian & Eastern Newspaper Society (supra), there was opinion of an internal audit party of the IT Department and it was held that the opinion of the internal audit report of IT Department on a point of law cannot be regarded as "information" within Section 147(b) of IT Act, 1961, for the purposes of reopening an assessment. The following observation of the Hon'ble Supreme Court of India is extracted below to clarify the point:
"The opinion of an internal audit party of the IT Department on a point of law cannot be regarded as "information" within the meaning of Section 147(b) of the IT Act, 1961, for the purpose of reopening an assessment. But although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying Section 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose. That part alone of the note of an audit party which mentions the law which escaped the notice of the ITO constitutes "information" within the meaning of Section 147(b); the part which embodies the opinion cannot be taken into account by the ITO. In every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO."
30. In view of the above, it can be said that the nature of audit report has to be taken in the light of the ratio of the decision of Hon'ble Supreme Court of India laid down above. In our view, therefore, the contention of the assessee that the learned CIT(A) has not properly considered the issue in the light of the ratio of the decision in the case of Indian & Eastern Newspaper Society (supra), carries some force.
31. So far as the scope of amended provision contained under Section 147 of FT Act is concerned, in a recent decision in the case of Kalvinator of India (P) Ltd. (supra), the Full Bench of Hon'ble Delhi High Court has considered the issue in detail. After making reference to various decisions including decision in the case of Indian & Eastern Newspaper Society (supra), UCO Bank v. CTT (1999) 237 TTR 889 (SC), CTT v. Anjum M.H. Ghaswala (2001) 252 TTR 1 (SC), the decision of Hon'ble Gujarat High Court in the case of Prafull Chum Lal Patel v. Asstt. CIT (1999) 236 ITR 832 (Guj), the decision in the case of Bawa Abhai Singh v. Dy. CIT (2002) 253 ITR 83 (Del), decision of Hon'ble Allahabad High Court in the case of Foramer v. CTT (2001) 247 ITR 436 (AE) and also other decisions on the issue, the Hon'ble Court has observed that in case of mere change of opinion, there is no jurisdiction to the AO to initiate proceedings under Section 147 of the IT Act, 1961. According to the Hon'ble Court, Section 147 does not postulate conferment of power upon the AO to initiate reassessment proceedings upon a mere change of opinion. Regarding the scope of Section 147 as amended from 1st April, 1989, the Hon'ble Court has quoted the observations of the Hon'ble Gujarat High Court in the case of Garden Silk Mills (P) Ltd. v. Dy. CTT (1999) 237 ITR 668 (Guj), which is as under:
"The reasons recorded by the AO which led to the belief about the escapement of assessment disclose that the present case is nothing by mere change of opinion on the facts which were already before the AO while making the first assessment to which conscious application of mind is reflected from the proceedings, and allowed in the computation and which has not been disputed by the Revenue."
After making reference to other decisions on the scope of Section 147 prior to amendment introduced w.e.f 1st April, 1989, the Hon'ble Court proceeded to consider the question as to whether any change in law has been brought about on account of amendment. After making reference to its earlier decision in the case of Jindal Photo Films v. Dy. CTT (1998) 234 ITR 170 (Del) and the decision of the Hon'ble Allahabad High Court in the case of Foramer (supra), it was observed that even under the newly substituted Section 147, w.e.f. 1st April, 1989, an assessment could not be reopened upon a mere change of opinion, In the case of Prafull Chunilal Pate] (supra), the Hon'ble Gujarat High Court had held as under:
"The power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. The words "escaped assessment", where the return is filed, cover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration, or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based.
In cases where the AO had overlooked something at the first assessment, there can be no question of any change of opinion, when the income which was chargeable to tax is actually taxed as it ought to have been under the law but was not, due to an error committed at the first assessment,"
The Full Bench of Delhi High Court dissented from that decision and observed as under :
"We are, with the respect, unable to subscribe to the aforementioned view. If the contention of the Revenue is accepted the same, in our opinion, would confer an arbitrary power upon the AO; The AO who had passed the order of assessment or even his successor officer only on the slightest pretext or otherwise would be entitled to reopen the proceeding. Assessment proceedings may be furthermore reopened more than once. It is now trite that where two interpretations are possible, that which fulfils the purpose and object of the Act should be preferred."
32. The Hon'ble Court has also considered the notification of Board No. F. No. 400/234/95-IT(B) dt. 23rd May, 1996, and Circular No. 549 of CBDT dt. 31st Oct., 1989, and held that on perusal of Clause 7.2 of the said circular, it would appear in no uncertain terms it was stated as to under what circumstances the amendments had been carried out i.e., only with a view to allay fears that the omission of the expression "reason to believe" from Section 147 would give arbitrary powers to the AO to reopen past assessment on mere change of opinion. It has further been observed that it is, therefore, evident that even according to the CBDT a mere change of opinion cannot form the basis for reopening a completed assessment. The Hon'ble Court has even made observation that a statute conferring an arbitrary power may be held to be ultra vires Art. 14 of the Constitution of India. According to the Court, if two interpretations are possible, the interpretation, which upholds constitutionality, it is trite, should be favoured.
33. So far as the opinion based on audit report is concerned, the Hon'ble Court has made following observation:
"We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the AO had received information from an audit report which was not before the ITO, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself."
These observations are fully applicable to the present case of the assessee. Thus, in our opinion, the decision of Full Bench of Hon'ble High Court is applicable to the facts of the present matter and in view of the same; the reopening of assessment cannot be upheld on the facts and circumstances of the present case. It may be pointed out that the case of Prafull Chunttal Patel v. Asstt. CIT (supra), on which the learned CIT(A) placed reliance has been dissented from by the Hon'ble High Court. Thus, in view of the above legal and factual aspect of the matter, the ground taken by the assessee deserves to be allowed.
34. Hence, ground No. 2 is allowed in favour of the assessee.
Ground No. 3 (a, b,c & d)
35. These grounds are directed against the findings of the learned CIT(A) in assessing the interest income on accrued basis and in treating the interest income as income from other sources. Since these grounds are argumentative in nature, we do not consider it proper to repeat the same in this order.
36. The learned CIT(A) has upheld the approach of the AO in treating the income from interest to be income from other sources. He has also rejected the claim of the assessee in setting off of the interest received against interest paid. In doing so, he has placed reliance on the decision of the Hon'ble Supreme Court of India in the case of CIT v. V.P. Gopinathan (2001) 248 ITR 449 (SC).
37. The learned counsel for the assessee, Shri P.S. Bhargava, assailing the order of the learned CIT(A), has submitted that the view taken by him is not legally justified. In this regard, his categoric submission was that since interest income from FDRs was inextricably connected with the business activity of the assessee, the income from FDRs cannot be treated as income from other sources.
38. The learned Senior Departmental Representative, on the other hand, placed reliance on the order of the learned CIT(A).
39. We have carefully considered the facts and circumstances relating to this issue, the entire material on record and the rival submissions. In the case of Asstt. CIT v. Gallium Equipment (P) Ltd. (2001) 73 TTJ (Del)(TM) 130 : (2001) 79 ITD 41 (Del)(TM), the Tribunal, Delhi Bench, Delhi has held that, having regard to fact that these FDRs were inextricably linked with day-to-day business of assessee, they had direct nexus with industrial undertaking of assessee and interest income has to be treated as income derived from said undertaking and, therefore, the assessee was entitled to relief under Section 80-I with respect to interest relating to such FDRs.
40. It may be pointed out that the Lucknow Bench of Tribunal has also considered the issue in the case of Roll Tubes Ltd. v. Dy. CIT (ITA No. 1354/A11/1994) and vide its order dt. 28th March, 2002, rendered in that case has placed reliance on the decision of Delhi Bench of Tribunal in the case of Gallium Equipment (P) Ltd. and has made the following observations:
"17. The decision of the Delhi Bench is based upon the decision of Mumbai (sic-Bombay) High Court in the case of CIT v. Nagpw Engg. Co. Ltd. (2000) 245 ITR 806 (Bom), which decision became final as SLP of the Department was rejected by Hon'ble Supreme Court of India.
18. In the case of Nagpui Engg. Co. Ltd. (supra), the Hon'ble Mumbai High Court has held that the Tribunal was justified in directing the AO to treat the interest income from fixed deposits as eligible profits of the business while computing the deduction under Section 80HHC and Section 80-1 of the Act.
19. In view of the legal position as laid down in the above referred decision of Mumbai High Court and in other decisions cited before us by the learned counsel for the assessee, we are of the considered view that the interest income earned by the assessee on the FDRs in the facts and circumstances of this case was to be treated as business income of the assessee and, therefore, it should not have been excluded while computing income for the purpose of deductions allowable under Sections 80HH and 80-1 of the Act. Hence, we reverse the finding of the CIT(A) and allow Ground No. 5 taken by the assessee in this appeal."
41. Since the issue involved in the present case is similar, we follow our order dt. 28th March, 2002, and hold that interest income earned on FDRs in the case of the assessee is to be treated as business income of the assessee.
42. The learned CIT(A) has placed reliance on the decision of the Hon'ble Supreme Court of India in the case of CIT v. V.P. Gopinathan (supra). In that case the assessee, an individual and who was not running any business undertaking, had put moneys in fixed deposit with the bank and had earned interest of Rs. 1,17,444. On the security of the amount so deposited, the assessee took a loan from the bank and paid in respect of the loan, interest of Rs. 90,410. The question was whether the assessee could be taxed only on the difference of Rs. 27,034. It was held that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. It was also held that since there was no such provision in law that the interest on the loan taken from the bank did not reduce income by way of interest on the fixed deposit. It may be pointed out that in that case, the learned counsel for the assessee had made it clear that the assessee's case did not rest upon the provision of Section 57(iii) of the Act. In other words, it was not the contention of the assessee that it was paying interest to the bank to facilitate the earning of the interest from the bank. The present case is, therefore, distinguishable from the case of Dr. V.P. Gopinathan (supra) inasmuch as that was the case of an individual whereas the present case is that of a company which was engaged in 100 per cent export business and further the taking of FDRs was an activity which was inextricably contracted within the business activity of the assessee and such direct nexus of the business activity with the interest earning activity which was found in the case of the assessee was also not established in the case of Dr. V.P. Gopinathan (supra).
43. So far as the claim of the assessee for setting off of the interest earned against the interest paid is concerned, the assessee had placed reliance on the decision in the case of Pink Star v. Dy. CIT (2000) 66 TTJ (Bom) 885 : (2000) 72 ITD 137 (Bom), the I Bench of Bombay Tribunal The Bench has considered the issue relating to setting of interest and held as under:
"Sec. 80HHC of the IT Act, 1961--Deductions--Exporters--Asst. yr. 1994-95--Whether while computing profits of business for purpose of Section 80HHC, revenue receipts can be adjusted against revenue expenditure of like nature--Held, yes--Assessee earned interest from bank and also paid interest and after set off, interest paid to bank was more--AO while computing deduction under Section 80HHC reduced 90 per cent of gross receipt of interest for purpose of working out profit of business-Whether since expenditure on interest was higher than interest income, no interest income augmented profits of business which needed to be reduced as envisaged by Section 80HHC (books of account)-Held, yes."
44. In the case of Suhag Traders (P) Ltd. v. ITO (supra), Delhi 'D' Bench considered the issue and held that interest on FDRs could be set off against interest and other charges payable to bank and deduction under Section 80HHC shall be computed after allowing such charges paid to bank.
45. The learned CIT(A) has rejected the claim of the assessee by placing reliance on the decision of Dr. V.P. Gopinathan (supra). We have considered the entire material. As observed earlier, the case of Dr. V.P. Gopinathan is distinguishable from the present case. In our opinion, the issue stands fully covered by the decision in the case of Pink Star (supra) and in the case of Suhag Traders (supra).
46. In view of the above, ground No. 3 (a, b, c & d) are allowed in favour of the assessee.
Ground Wo. 4
47. This ground challenges the action of the AO in charging interest under Sections 234B and 234C. This ground runs as under:
"4. (a) Because the charge of interest under Section 234B Rs. 2,24,542 and under Section 234C Rs. 189/- is without jurisdiction, against facts and circumstances of the case, arbitrary and illegal, being against the decisions of the Hon'ble Supreme Court, Patna High Court and Allahabad High Court.
(b) Because the decision of Kalyan Kumar Ray v. CIT (1991) 191 TTR 634 (SC) being on entirely different facts has been illegally misapplied to the facts of our case."
48. The learned CIT(A) has upheld the action of the AO by observing as under:
"I have considered the facts of the case as well as the arguments of the appellant. In the decision of Kalyan Kumar Ray v. CIT (1991) 191 ITR 634 (SC), the Hon'ble Supreme Court of India had held that IYNS-150 or tax computation sheet forms part of the assessment order. It therefore, follows that if any interest is charged in such tax computation sheet and such sheet is duly signed by the AO, then it will have to be considered as if the interest has been charged in the assessment order itself. I find that in the present case, interest has been duly charged in the tax computation sheet and such sheet has been signed by the AO. Therefore, in view of the above decision of the Hon'ble Supreme Court of India, I am of the opinion that interest has been correctly charged in the assessment order itself. This ground of appeal therefore, fails."
49. Before us, the learned counsel for the assessee submitted that the issue stands covered by the decision of Hon'ble Supreme Court of India in the case of CIT v. Ranchi Club Ltd. He also placed reliance on the decision of Smt. Tej Kuman v. CIT and Ors.
50. We may observe that since ground Nos. 2 and 3 have been allowed in favour of the assessee, the issue relating to the charging of interest under Section 234B has become non-significant and remains of academic interest only. In view of our finding on various grounds taken by the assessee and in particular, our finding on ground No. 3, upholding the claim of the assessee for exemption of its total income including interest income under the provisions contained under Section 80HHC, there remains no scope for charging interest under Section 234A or 234B. Otherwise also, charging of interest is consequential. Hence, we are not required to adjudicate this ground of appeal.
51. Hence this ground is decided accordingly.
Ground No. 552. Ground No. 5 is of general nature, which does not require any specific adjudication.
ITA No. 54/Luck/200253. The assessee has taken same grounds in this appeal which has been taken by him in ITA No. 53/Luck/2002.
54. The facts and circumstances relating to this appeal are similar to the facts and circumstances in ITA No. 53/Luck/2002 except there being difference in the figures of, amount. The learned CIT(A) has also followed his order for asst. yr. 1994-95 in the asst. yr. 1995-96 which is involved in this appeal. After considering the entire relevant material, submissions of learned counsel for the assessee and that of learned 'CIT(A) in relation to grounds of appeal in this appeal, which are same as in ITA No.53/Luck/2002, we decide all the grounds in this appeal by directing that our findings on various grounds in that appeal shall equally apply to the findings on various grounds in this appeal and the reasons assigned by us while deciding various grounds in that appeal should be taken as assigned while deciding grounds in this appeal also.
55. Consequently, all the grounds of this appeal stand allowed in favour of the assessee.
56. In the result, both the appeals are allowed in favour of the assessee.