Income Tax Appellate Tribunal - Chennai
Tocheunglee Stationery Mfg. Co. (P) ... vs Income Tax Officer, Company Ward Iii(1) on 21 June, 2004
Equivalent citations: [2006]5SOT428(CHENNAI)
ORDER
N.R.S. Ganesan, Judicial Member.
Both the appeals of the assessee relate to the assessment years 2001-02 and 2000-01. Since common issue arises for consideration in both the appeals, we heard the same together and disposing of the same by this common order.
2. Mr. R. Vijayaraghavan, the learned counsel for the assessee, submitted that the issue arises for consideration in this appeal is regarding grant of deduction in respect of interest income received by the assessee from the bank to the extent of Rs. 5,31,125 and provision no longer required which is written back in the books of' account of the assessee to the extent of Rs. 11,60,048 and also sales tax refund received by the assessee to the extent of Rs. 1,16,212. The learned counsel for the assessee further submitted that the assessee also claimed deduction under section 80HHC in respect of resale value of Special Import License to the extent of Rs. 7,494. The learned counsel further submitted that section 10B has undergone a vast change. It is now that the assessee is entitled for deduction and not exemption. According to the learned counsel, originally the assessee was entitled for exemption. The learned counsel further submitted that the profit for deduction under section 10B has to be computed by multiplying the business profit by the export turnover divided by total turnover. This method of computation for the purpose of claiming deduction under section 10B is almost similar to section 80HHC. The learned counsel further submitted that there is no clause as contained in Explanation (baa) to section 80HHC to exclude 90 per cent of the interest and miscellaneous income. Therefore, according to the learned counsel, the profit has to be computed by taking into account all the business profit received by the assessee.
3. The learned counsel for the assessee further submitted that the assessee is 100 per cent export-oriented unit and, therefore, eligible for deduction under section 10B. In the course of its business, the assessee deposited money in the bank in order to obtain guarantee in favour of the Government of India as per the Notification issued by the Customs department. According to the learned counsel, unless and until the assessee deposits the money and obtain guarantee in favour of the Government of India, the assessee will not be permitted to import goods free of duty for the purpose of manufacturing and re-export. If the guarantee is not provided, the assessee has to pay customs duty on import. So the deposit made by the assessee reduces the expenditure incurred by the assessee in exporting goods. Therefore, the learned counsel submitted that the interest income received from the bank is directly connected with the business of the assessee. The learned counsel placed his reliance on the judgment of the Apex court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 21 (SC) and submitted that interest received from bank deposit which is made to procure letter of credit for purchase of machinery was held to be a business income. The learned counsel also placed his reliance on the judgment of the Madras High Court in the case of CIT v. N.S.C. Shoes (2002) 258 ITR 749 (Mad) and submitted that the High Court held that interest from bank deposit for obtaining letter of credit is business income and should be taken into account for the purpose of relief under section 80HHC even though not allowable under section 80HHC. The learned counsel further invited our attention to the notification issued by Mumbai Commissioner of Customs and submitted that the assessee has to furnish 5 per cent of the bond amount as bank guarantee or any other approved Government security for the purpose of carrying on its business. Therefore, there is a next is between the deposit made by the assessee and the interest received by the assessee. Since the deposit is admittedly made for the purpose of business, the interest received by the assessee has to be treated as business income. The learned counsel has also filed the bond extract filed before the Assistant Commissioner of Central Excise to show that the bank guarantee issued by the Punjab National Bank, Mylapore Branch.
4. Coming to the provision made which was written back in the books of account as no longer required is also to be treated as business income. The learned counsel for the assessee submitted that the assessee had provided excess amount towards incentives and bonus for the earlier years aggregating to Rs. 11,60,048. These provisions are now reversed and credited in the books of account. These amounts were not claimed in the earlier years. Since the provision made was reversed, the assessee is entitled for deduction under section 10B. According to the learned counsel, the observation of the first appellate authority that the provision was not deducted in the earlier years and the amount was allowed under section 10 B is wrong as relief under section 10 B is on income and not deductions. In any event, according to the learned counsel, that issue is not relevant as the amount is not at all taxable in this year and so exemption under section 10 B is irrelevant. According to the learned counsel, the provision which is written back in the books of account is connected with the business of the assessee. Therefore, the assessee is entitled for deduction in respect of the provision also.
5. The learned counsel for the assessee further submitted that the sales tax which was paid in the earlier year was refunded when the assessee filed the proof of export. The refund of sales tax is nothing but a reduction to purchase price of the goods. Therefore, it is an income under section 41(1) and it is closely connected with the business activity of the assessee. Therefore, the sales tax refund received by the assessee should also be included for the purpose of computing relief under section JOB.
6. The learned counsel for the assessee further submitted that the assessee has received Special Import License on the basis of the scheme framed by the Government of India. The sale value of the special import license was given to the exporter as compensation. This income is also taken into account by quoting the price for exports. Therefore, this income is also eligible to be included for the purpose of' relief under section 10B. The learned counsel further submitted that sale value of special import license is an income in view of under section 28(iii) of the Income Tax Act.
7. On the contrary, Mr. S. Ganapathy Iyer, the learned departmental representative submitted that admittedly the assessee has received interest income of Rs. 5,31,125 from the bank deposit. The learned Departmental Representative further submitted that whether the interest income would be included for the purpose of computing relief under section 10A was considered by the Madras High Court in the case of CIT v. Menon Impex (P) Ltd (2003) 259 ITR 403 (Mad). According to the learned Departmental Representative, the interest income received by the assessee on deposit made by it in bank in the course of business for the purpose of obtaining letter of credit and such a letter of credit was in turn used for the purpose of business of the assessee does not establish a direct nexus between the interest and the industrial undertaking. According to the learned Departmental Representative, the word used in section 10B is 'derived from'. The learned Departmental Representative further submitted that the language employed in sections 10A and 10B is similar and identical, Therefore, the income should be derived from the export activity and the interest income, merely because it was received from the deposit made for the purpose of getting a bank guarantee in favour of the Government of India as required by the Customs department that will not make interest income as eligible for deduction under section 10B. In other words, according to the learned Departmental Representative, the interest income received by the assessee is not derived from export business. The learned Departmental Representative further submitted that the language of sections 10A and 10B is almost similar. Therefore, the decision rendered by the Madras High Court in the case of Menon Impex (P) Ltd. (supra) is squarely applicable in respect of claim under section 10B also. Referring to section 80HHC and the judgment of the Madras High Court in the case of N.S.C Shoes(supra), the learned departmental representative submitted that sections 10A and 10B are similar in nature and, therefore, the judgment of the Madras High Court in the case of Menon Impex (P) Ltd. (supra) should be preferred rather than N.S.C Shoes case (supra).
8. The learned departmental representative further submitted that the assessee has made excess provision towards incentive and bonus for the earlier years aggregating to Rs. 11,60,048. The assessee reversed this provision and credited the same in the books of account. On this issue, the first appellate authority called for a remand report from the assessing officer. The assessing officer has also filed the remand report stating that the assessee was allowed exemption under section 10B in the respective assessment years, namely, 1999-2000 and 2001-02 which included the provision disallowed by the assessee as stated in the written submission. Since the expenditure which was disallowed was fully allowed as exemption under section 10B, the disallowance was treated as business income of the respective assessment year. Therefore, any excess provision withdrawn and made as income for the assessment year under consideration has to be taxed on the ground that the income relating to earlier years are not taxable under section 10B. According to the learned Departmental Representative, the entire provision deducted under section 10B was granted in respect of the year in which the provision was made.
9. Coming to the sales tax refund, the learned Departmental Representative submitted that the assessee has received a refund of Rs. 1, 15,212 after producing a proof for export. The refund of sales tax is nothing but business income. The assessee is entitled for deduction in respect of income derived from export business. The refund received by the assessee may be closely connected with the business activity of the assessee, but it does not mean that the assessee derived the income from export. Therefore, the learned Departmental Representative submitted that the refund received by the assessee from sales tax is not eligible for deduction under section 10B.
10. The next issue is regarding sale value of special import license. The learned Departmental Representative submitted that the sale of import entitlement has been pointed out by the assessing officer. The learned Departmental Representative further submitted that there was no nexus between the sales and activity of the assessee. According to the learned departmental representative the profit from sale of import entitlement is not income from the eligible industrial activity. Therefore, the assessee is not entitled for any deduction under section 10B.
11. Having heard the learned representatives on both sides, we also perused the material available on record. Let's discuss issue by issue. The first issue is regarding interest received by the assessee from the bank deposit. The claim of the assessee is that as per the notification issued by the Government of India, the assessee has to produce bank guarantee for the purpose of getting permission to import the goods free of duty. if the assessee has not furnished the necessary bank guarantee, it has to pay the import duty on the export of goods. Therefore, the learned counsel for the assessee submitted that the interest income received by the assessee would reduce the cost of import of the assessee. We have also carefully gone through the judgment of the Supreme Court in the case of Kamal Co-operative Sugar Mills Ltd. (supra) and also the judgment of the Madras High Court in the case of Menon Impex (P) Ltd. (supra) and also the judgment of N.S.C Shoes case (supra).
12. We have also carefully gone through the provisions of section 10B. Sub-clause (4) of section 10B says that profit derived from the export of article or thing 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 article or thing bears to the total turnover of the business carried on by the undertaking. We find a similar provision in section 10A(4). Section 10A relates to special deduction in respect of newly established undertakings in free trade zone. Section 10B relates to special deduction in respect of newly established hundred per cent export-oriented undertakings. We find the language employed in sections 10A and 10B are similar as submitted by the learned Departmental Representative Section 10A says that a deduction shall be allowed from the total income of the assessee in respect of profit and gains derived by an undertaking from the export of article or thing or computer software. Section 10B also speaks of deduction from the total income of the assessee in respect of profit and gain derived by hundred per cent export-oriented unit from the export of article or thing. Sub-clause (4) in both sections 10A and 10B says the method of computation. The languages used in both the sections are identical and same. The Madras High Court considered section 10A in the case of Menon Impex (P.) Ltd (supra). After referring to the judgment of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), the Madras High Court held that the interest received by the assessee on deposit made for the purpose of obtaining letters of credit which letters of credit would in turn used for the purpose of business of the assessee does not establish a direct nexus between the interest and industrial undertaking. In this case also, the assessee has obtained bank guarantee in favour of Government of India for the purpose of importing goods without duty. In other words the assessee has made the deposit for the purpose of getting bank guarantee for the purpose of its business. The bank guarantee was used in the business of the assessee. in our view, the facts before the Madras High Court in the case of Alenon Impex (P) Ltd. (supra) are identical as that of one before us. Therefore, the judgment of the Madras High Court is squarely applicable to the facts of the present case. Therefore, in our view, the interest received by the assessee from the deposit made for the purpose of bank guarantee does not establish nexus between the interest and the industrial unit of the assessee.
13. We have also carefully gone through the judgment of the Supreme Court in the case of Karnal Co-operative Sugar Mills Ltd. (supra). The Supreme Court confirmed the judgment of the Punjab and Haryana High Court which held that the interest received by the assessee from the deposit made to obtain the letter of credit for the purpose of machinery directly relatable to the activity of acquiring an asset, therefore, the interest earned by the assessee shall go to reduce the cost of asset acquired out of such transaction. Section 10B is a special provision for granting deduction in respect of 100 per cent export oriented units. Therefore, section 10B has to be interpreted as per the language employed in that provision. The interest received by the assessee may be a business income. The question is whether it has direct nexus with that of' the industrial unit. The Supreme Court in the case of Karnal Co-operative Sugar Mills Ltd. (supra) has not considered the provisions of sections 10A and 10B. However, the Madras High Court considered section 10A which is almost similar in section 10B and also taking note of the judgment of the Apex Court in the case of Sterling Foods (supra), found that the interest received from a similar deposit does not establish a direct nexus between the interest and the industrial undertaking. Therefore, in our view, the judgment of the Madras High Court and also the Apex Court in the case of Sterling Foods (supra) would be applicable since the identical facts are concerned.
14. We have also carefully gone through the judgment of the Madras High Court in the case of N.S.C. Shoes (supra). The Madras High Court held that the term 'derived from' is narrower than the term 'attributable'. Insofar as section 80HHC is concerned, the Madras High court held the interest received by the assessee from the bank deposit has been included in the computation and assessed as income from profits and gains of the business. Therefore, this has to be regarded as having been derived from the export effected by the assessee. In this case, the Madras High Court has not considered the judgment of the Supreme Court in the case of' Sterling Foods (supra). In the case of Menon Impex (P) Ltd. (supra), the Madras High Court after considering the judgment of the Apex Court in the case of Carnbay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) and also the judgment of the Apex court in the case of Sterling Foods (supra), came to the conclusion that the interest received by the assessee does not establish direct nexus between the interest and industrial undertaking. Furthermore, the language of section I OA is similar and identical when compared to section 10B. Therefore, in our view, we are bound to follow the judgment of the Madras High Court in the case of Menon Impex (P.) Ltd. (supra). Since Madras High Court held that the interest income received from bank deposit is not eligible for deduction under section 10A, by respectfully following the said judgment, we hold that the interest received by the assessee on the deposit made for the purpose of getting bank guarantee in favour of Government of India is also not eligible for deduction under section 10B. In view of the above discussion, we do not find any infirmity in the order of the lower authority.
15. Now coming to the issue of provision which is written back in the books of account, the assessee has admitted provided excess amount towards incentive and bonus for earlier years. According to the assessee, this provision was written back under section 41(1) of the Income Tax Act. The case of the assessee is that since the provision is written back in the accounts, it has to be treated as business income and the assessee is eligible for deduction under section 4)(1). From the order of the first appellate authority, it appears a remand report was called for from the assessing officer. It appears for the assessment years 1999-2000 and 2000-01, the assessee was allowed exemption under section 10B fully which included the provision. Once the excess provision is withdrawn and admitted as income for the assessment year under consideration, which will not automatically qualify for deduction under section 10B. It may be an income derived in the respective assessment year after a provision was made. However, for the purpose of claiming deduction under section 10B, the assessee should show that the profit was received from the export for the assessment year under consideration. In our view, though by way of legal fiction, the excess provision was treated as income under section 41(1) of the Income Tax Act, it cannot be treated as income derived from export. Therefore, we do not find any infirmity in the order of the first appellate authority. Accordingly, we confirm the same.
16. No coming to the refund received by the assessee from sales tax authorities. As already discussed regarding the issue of excess provision, the refund of sales tax may be a business income because of section 41(1) of the Income Tax Act. However, it cannot be construed as income received from export of business or it would not form part of export turnover.
17. Now coming to the special import license, the assessee received this special import license because of the scheme framed by the Government of India to encourage the export business. It may be a business income because of section 28(iii) of the Income Tax Act. For the purpose of claiming deduction under section 10B, the income should be derived from export business and form part of export turnover. The immediate source for special import license may be the scheme framed by the Government of India and not the export. As held by the Madras High Court in the case of Menon Impex (P) Ltd. (supra), the income should be derived from the export business. In view of the above, we do not find any infirmity in the order of the first appellate authority. Accordingly, we confirm the same.
18. in the result, both the appeals filed by the assessee stand dismissed.