Income Tax Appellate Tribunal - Mumbai
Paper Products Ltd, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH: MUMBAI
BEFORE SHRI P M JAGTAP, ACCOUNTANT MEMBER
AND SHRI R S PADVEKAR, JUDICIAL MEMBER
ITA No 798/Mum/2007
(Assessment Year: 2002-03)
ITA No 1705/Mum/2007
(Assessment Year: 2003-04)
The Paper Products Ltd, Vs ACIT 3(2),
Regent Chambers, 13th Floor, Aayakar Bhavan, M K Road,
Nariman Point, New marine Lines,
Mumbai -400 021 Mumbai -400 020
PAN: AAACT 0086 E
Appellant Respondent
ITA No 1645/Mum/2007
(Assessment Year: 2002-03)
ITA No 2518/Mum/2007
(Assessment Year: 2003-04)
DCIT 3(2), Vs The Paper Products Ltd,
Aayakar Bhavan, M K Road, Regent Chambers, 13th Floor,
New marine Lines, Nariman Point,
Mumbai -400 020 Mumbai -400 021
PAN: AAACT 0086 E
Appellant Respondent
Assessee by: Shri C N Vaze
Revenue by: Shri N K Balodia/ Smt Chandra Rama-
krishnan
ORDER
PER P M JAGTAP, ACCOUNTANT MEMBER
These four appeals, two by the revenue and two by the assessee are cross appeals for AY 2002-03 and 2003-04 and since common issues are involved therein, the same have been heard together and are being disposed off by this single consolidated order.
2 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
2. First we shall take-up the cross appeals filed for AY 2002-03 being ITA No 798/Mum/2007 and 1645/Mum/2007, which are directed against the order of Learned CIT (A) -III Mumbai dated 12.12.2006.
3. As regards ground Nos. 1, 2 & 3 of assessee's appeal, the Learned Counsel for the assessee has conceded before us that the common issue involved therein relating to disallowance of assessee's claim for deduction on account of write off of non- compete fees is squarely covered against the assessee by third member decision of the co-ordinate Bench of this Tribunal in assessee's own case for assessment year 1998-99 to assessment year 2001-02. He has submitted that the assessee, however, has taken this matter to the Hon'ble Bombay High Court, which is still pending. He has submitted that the issue involved in the year under consideration being identical with the question of law arising in the case of the assessee for earlier years i.e. assessment years 1999-2000 to assessment year 2001-02 which is pending before the Hon'ble Bombay High Court, the assessee has filed a declaration as required by the provisions of section 158A(1) which may be taken into consideration. Accordingly we decide this issue against the assessee following the decision of the Tribunal in the assessee's own case for assessment years 1998-99 to assessment year 2001-02 with the right to the assessee to seek amendment of this order, if necessary, so as to bring the same in conformity with the decision of the Hon'ble High Court on the identical question of law when the same becomes final for assessment years 1998-99 to assessment year 2001-02. Ground 1, 2 and 3 of assessee's appeal are accordingly dismissed.
4. As regards ground No.4 and 5, the Learned Counsel for the assessee has conceded the common issue raised therein relating to the disallowance of assessee's claim for deduction u/s 35D on account of share issue and debenture expenses is squarely covered against the assessee. He has submitted that the issue involved in the year under consideration being identical with the question of law arising in the case of the assessee for earlier years i.e. assessment years 1999-2000 to assessment year 2001-02 which is pending before the Hon'ble Bombay High Court, the assessee has filed a declaration as required by the provisions of section 158A(1) 3 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 which may be taken into consideration. Accordingly, we decide this issue against the assessee following the decision of the Tribunal in the assessee's own case for assessment years 1998-99 to assessment year 2001-02 with the right to the assessee to seek amendment of this order, if necessary, so as to bring the same in conformity with the decision of the Hon'ble High Court on the identical question of law when the same becomes final for assessment years 1998-99 to assessment year 2001-02. Ground 4 and 5 of assessee's appeal are accordingly dismissed.
5. Ground No. 6 and 7 relating to disallowance on account of professional fees paid for divestment in PPL feedback Ltd made by the Assessing Officer and confirmed by the Learned CIT (A) are not pressed by the Learned Counsel for the assessee at the time of hearing before us. The said grounds are accordingly dismissed as not pressed.
6. As regards ground No. 8, the Learned Counsel for the assessee has conceded that the issue raised therein regarding to assessee's claim for inclusion of interest on FDRs and interest on statutory deposits in the profits for deduction u/s 80HHC is also squarely covered against the assessee by the decision of the Tribunal in assessee's own case for assessment years 1998-99 to assessment year 2001-02. Respectfully following the said decision of the Tribunal, we uphold the impugned order of Learned CIT (A) on this issue and dismiss ground no.8 of the assessee's appeal.
7. As regards ground No. 9 relating to the assessee's alternative claim for inclusion of only net interest income from the profits eligible for deduction u/s 80HHC, the Learned Counsel for the assessee has relied on the decision of Special Bench of ITAT Delhi in the case of Lalsons Enterprises vs DCIT reported in 89 ITD 25. He has contended that this issue may, therefore, be restored to the file of the Assessing Officer for examining the claim of the assessee for netting off interest income keeping in view the said decision of the ITAT. The Learned Departmental Representative, on the other hand, has relied on the decision of Hon'ble P&H High Court in the case of Rani Paliwal vs CIT 268 ITR 220, of Hon'ble Madras High Court in the case of CIT vs V Chinnapandi 282 ITR 389 and that of Hon'ble Delhi High Court in 4 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 the case of CIT vs Shri Ram Honda Power Equip 289 ITR 475 and contended that for computing deduction u/s 80HHC, gross interest income is liable to be excluded from the eligible profits and not the net interest as sought to be claimed by the Learned Counsel for the assessee.
8. After carefully perusing the judicial pronouncements cited by both the sides, it is noted that although Hon'ble P&H High Court in the case of Rani Paliwal (supra) and Hon'ble Madras High court in the case of V Chinnapandi (supra) have held that the gross interest income is liable to be reduced from the profits of the business for computing deduction u/s 80HHC, the alternative claim of the assessee for netting off interest income against interest expenditure has been specifically considered on merit by the Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra). In the said decision, it was held by Hon'ble High Court after taking into consideration all the relevant aspects of the matter that the word "interest" in clause (baa) to Explanation to section 80HHC is indicative of "net interest" i.e. gross interest less the expenditure incurred by the assessee for earning such interest. Hon'ble Delhi High Court thus dissented from the P&H High Court decision in the case of Rani Paliwal vs CIT (supra) and also Madras High Court decision in the case of V Chinnapandi and affirmed the decision of Special Bench of Delhi in the case of Lalsons Enterprises (supra). Hon'ble Delhi High Court also laid down certain guidelines for deciding the issue relating assessee's claim for the benefit of netting off interest income as follows:
"(i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports.
(ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the "profits of the business", the Assessing Officer has to undertake a two-step exercise in the following sequence. He has to first "compute" the profits of the business under the head "Profits and gains of business or profession." In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof.
5 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
(iii) In arriving at profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the character of "income from other sources" which in any event are treated under sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC . The Assessing Officer will apply the law as explained in the judgments of the Kerala High c referred to above which have been affirmed by the hon'ble Supreme Court.
(iv) Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC.
(v) Interest earned on fixed deposits for the purposes of availing of credit facilities form the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income.
(vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of section 37 of the Act, claim as deduction, expenditure laid out for the purposes of earning such business income.
(vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the had "Profits and gains of business or profession" the following sums in order to arrive at the "profits of the business"
for the purposes of section 80HHC(3):
(a) 90 per cent, of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 i.e., export incentive ;
(b) 90 per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and
(c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.
(viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e., gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 8 ITR 25 (Delhi) to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab and Haryana High Court in Rani Paliwal [2004] 268 ITR 220 and the Madras High Court in Chinnapandi [2006] 282 ITR 389 and affirm the ruling of the Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 89 ITD 25 (Delhi).
6 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
(ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle."
9. In our opinion, the decision of Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra) is directly in favour of the assessee on the issue under consideration and respectfully following the same, we set aside the impugned order of Learned CIT (A) on this issue and restore the matter to the file of the Assessing Officer to allow the assessee's claim for benefit of netting of interest income keeping in view the guidelines laid down by Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra). Ground no.9 of the assessee's appeal is accordingly treated as allowed.
10. Ground No.10 and 11 relate to the assessee's claim for inclusion of services charges amounting to Rs 3,76,200/- and technical fees amounting to Rs 8,82,580/- in the profits eligible for deduction u/s 80HHC.
11. At the time of hearing before us, the Learned Counsel for the assessee has relied on the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co 260 ITR 371 to contend that the service charges and technical fees in question received by the assessee being part of its operational income, the same was liable to be included in the profits eligible for deduction u/s 80HHC. In the said decision, it was held by the Hon'ble Bombay High Court that other income forming part of assessee's operational income cannot be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC as per Explanation (baa) to that section. It was also held that no standard test for deciding what would constitute the operational income of the assessee can be laid down and in every case, the Assessing Officer will have to ascertain whether the other income forms part of operational income of the company after taking into consideration the nature 7 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 of the business, the nature of the activity and such other tests. It was also observed by Hon'ble Bombay High Court in this context that the Assessing Officer will have to ascertain as what is dominant business of the assessee-company and whether the other income accrues to the assessee as a part of the main business activity or whether they accrue out of incidental business. It is observed in this context that the amount of service charges and technical fees received by the assessee was held to be not includible in the profits of the business for the purpose of computing deduction u/s 80HHC by Learned CIT (A) for the following reasons given in any paragraph no.11.1 and 13.2 of his impugned order :
"11.1 I have carefully considered the submissions made by the appellant. In the case of CIT vs K K Doshi & Co 245 ITR 849 (Bom), it has been held that the service charges earned by the assessee from the job work having no direct nexus with export activities shall not be entitled to deduction u/s 80HHC. Further, in the case of Bangalore Clothing Company (supra) relied upon by the appellant, the assessee was a manufacturer and exporter of garments. The assessee was also doing labour job for others. It was observed by the Hon'ble Court that there was no difference between the activities relating to export business carried on by the assessee and the processes carried on for manufacturing garments for others under job work contracts. The activity of labour job involved use of machinery, labour, material which were also forming part of the activity of manufacturing garments by the assessee for its own sales. Under these circumstances, it was held by the court that the assessee was entitled to deduction u/s 80HHC in respect of the profits from job work. In the case of the appellant, the facts are entirely different. The appellant has provided only machinery to the persons doing job work for the appellant. The other expenses relating to the activity of manufacturing are borne by the job worker. The appellant is charging form the job worker for the use of machinery which can be termed as rent for the use of machinery. Therefore, the service charges recovered by the appellant from the use of machinery cannot be said to be a part of the operational income of the appellant. Accordingly, following the decision of jurisdictional High court in the case of Bangalore Clothing Co (supra) and M/s K K Doshi & Co (supra), the action of the AO in not allowing deduction u/s 80HHC on service charges received by the appellant at Rs 3,76,200/- is upheld.
13.2 I have considered the contention of the appellant. It is seen that the appellant is engaged in the business of manufacture and sale of packaging material of different types and sizes. It is also engaged in the business of manufacturing of metalized films, Poly films, labelling material, packing cartons etc. It is not engaged in the business of providing technical services. Therefore, the income of Rs 8,82,580/- received by the appellant as technical fees cannot be treated as a part of the operational income of the appellant.
8 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 Accordingly, following the decision in the case of Bangalore Clothing Co (supra), the appellant is not entitled to deduction u/s 80HHC on technical fess of Rs 8,82,580/-."
12. As is clearly evident from the relevant observations of the Learned CIT (A) reproduced above, the nature of assessee's business as well as the nature of receipts in question was duly examined by him and on such examination, he held that the service charges and technical fees received by the assessee were not forming part of its operational income. At the time of hearing before us, the Learned Counsel for the assessee has not been able to raise any material contention to rebut or controvert these observations recorded by Learned CIT (A) while disallowing the claim of the assessee for inclusion of service charges and technical fees in the profits of business for the purpose of computing deduction u/s 80HHC. These being so and keeping in view the decisions of Hon'ble Bombay High Court in the case of K K Doshi & Co (supra) and Bombay Clothing Co (supra) relied upon by Learned CIT (A), we find no infirmity in the order of Learned CIT (A) holding that the service charges and technical fees not being part of operational income of the assessee was liable to be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC. His impugned order on this issue is, therefore, upheld dismissing ground 10, 11 and 11 of the assessee's appeal.
13. As regards ground no.12 relating to the assessee's claim for reduction of only the net income from service charges and technical fees from the eligible profits for the purpose of computing deduction u/s 80HHC, we direct the Assessing Officer to examine the claim of the assessee for deduction on account of expenses, if any, incurred for earning the income from service charges and technical fees and accordingly take only the net income for exclusion from the profits of the business for the purpose of computing deduction u/s 80HHC. Ground no.12 of the assessee's appeal is treated as allowed for statistical purposes.
14. As regards ground no.13, 14 and 15, it is observed that the issues raised therein relating to the addition made on account of provision for bad and doubtful 9 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 debts written back has been remanded by the Learned CIT (A) to the Assessing Officer with a direction to verify the assessee's claim that there being no deduction allowed for the provision made for bad and doubtful debts in the earlier years, the addition made on account of write back of the said provision was not warranted and to allow appropriate relief to the assessee after such verification. The grievance of the assessee on this issue thus has already been taken care of by the direction given by Learned CIT (A) by his impugned order as agreed even by the Learned Counsel for the assessee at the time of hearing before us. The assessee, therefore, cannot be said to have any material grievance on this issue and this being so, we dismiss ground no.13, 14 and 15 of assessee's appeal treating the same as infructuous.
15. The grievance of the assessee, as projected in ground no.16, 17 and 18 of its appeal is that the Learned CIT (A) was not justified in not entertaining the following additional grounds sought to be raised before him "On the facts and circumstances of the case, the Learned Asstt Commissioner of Income tax, 3(2)-
1. erred in disallowing the depreciation, which was allowed till A.Y. 2001- 02 in respect of obsolete computers claimed as written off in A.Y. 1996-97 but disallowed in that year;
2. erred in disallowing depreciation which was allowed till A.Y. 2001-02 in respect of expenditure incurred on Foreign travel and on interest on borrowings in connection with purchase of plant and machinery."
16. We have heard the arguments of both the sides and also perused relevant material on the record. It is observed that the above additional grounds sought to be raised by the assessee before the Learned CIT (A) were not entertained by him on the ground that the issues raised therein had not been discussed by the Assessing Officer in the assessment order nor any such claim was made by the assessee also in its computation of total income. However, as held by the Full Bench of Hon'ble Bombay High Court in the case of Ahmedabad Electricity Ltd vs CIT 199 ITR 351, the basic purpose of an appeal in an income-tax matter is to ascertain the correct tax liability of the assessee in accordance with law. It was also held that the appellate authority therefore, can consider the proceedings before it and the material on record 10 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 before it for the purpose of determining the correct tax liability of the assessee and there is nothing either in section 251 or in section 254 which would indicate that appellate authorities are confined to considering only the objections raised before them. They can consider the entire proceedings to determine the tax liability of the assessee. Keeping in view this judgment of full Bench of Hon'ble jurisdictional High Court, we are of the view that the Learned CIT (A) should have admitted the additional grounds raised by the assessee before him as the issues sought to be raised therein were relevant for the purpose of determining the correct tax liability and should have remanded the matter to the Assessing Officer to examine the issues raised therein on merits. We, therefore, set aside the impugned order of Learned CIT (A) on these issues and restore the matter to the file of the Assessing Officer for deciding the issues raised by the assessee in the additional grounds on merits. Grounds no.16, 17 and 18 are accordingly allowed.
17. In Ground No.1 of its appeal for assessment year 2002-03 being ITA No. 1645/Mum/2007, the Revenue has challenged the action of the Learned CIT (A) in directing the Assessing Officer to reduce the amount of Rs 6 lakhs which is the fees paid in connection with divestment in PPL Feedback Packaging Ltd treating it as a part of the cost of transfer of shares and to allow the same in computing the long term capital loss.
18. During the year under consideration, the assessee-company had incurred expenses of Rs 6 lakhs on the divestment of shares and the same were claimed as deduction while computing the business income. Treating the said expenses to be of capital expenditure, the deduction claimed by the assessee for the same was disallowed by the Assessing Officer and the said disallowance was confirmed by Learned CIT (A). The Learned CIT (A), however, accepted the alternative contention of the assessee that the said amount incurred in connection with divestment of shares in PPL Feedback Packaging Ltd should be treated as a part of the cost of transfer of shares for the purpose of computing long term capital loss on sale of investments in PPL Feedback Packaging Ltd. Accordingly, he directed the Assessing Officer to reduce the amount of Rs 6 lakhs from the sale consideration received by 11 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 the assessee from sale of shares of PPL Feedback Packaging Ltd while computing the long term capital loss. At the time of hearing before us, the Learned Departmental Representative has not been able to raise any material contention to point out any infirmity in the impugned order of Learned CIT (A) on this issue. As rightly held by the Learned CIT (A), the amount of Rs 6 lakhs having been paid by the assessee in connection with divestment of shares of PPL Feedback Packaging Ltd, the same constituted expenditure incurred by it directly in connection with the transfer of shares and the same was, therefore, to be deducted from the full value of consideration as per section 48 while computing the long term capital loss. The Learned CIT (A), in our opinion, therefore was fully justified in allowing the claim of the assessee on this issue and upholding his impugned order, we dismiss ground no.1 of the revenue's appeal.
19. As regards ground No. 2 of revenue's appeal, it is observed that the issue raised therein relating to the assessee's claim for exclusion of excise duty and sales- tax from the total turnover for the purpose of computing the deduction u/s 80HHC is squarely covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of Lakshmi Machines reported in 290 ITR 667. Respectfully following the said decision of Hon'ble apex court, we uphold the impugned order of Learned CIT (A) giving relief to the assessee on this issue and dismiss ground no.2 of the revenue's appeal
20. As regards ground No. 3 of the revenue's appeal, it is observed that the issue involved therein relating to the assessee's claim for not excluding the deduction allowable u/s 80IB from the profit for the purpose of deduction u/s 80HHC is squarely covered against the assessee by the decision of Special Bench of ITAT at Delhi in the case of ACIT vs Hindustan Mint & Agro Products (P) Ltd 119 ITD 107. Respectfully following the said decision of Bench of ITAT, we set aside the impugned order of Learned CIT (A) giving relief to the assessee on this issue and restore that of the Assessing Officer. Ground no.3 of the revenue's appeal is accordingly allowed.
12 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
21. Now, we shall take-up the cross appeals for assessment year 2003-04 being ITA 1705/Mum/2007 and 2518/Mum/2007 which are directed against the order of Learned CIT (A)-III Mumbai dated 15.1.2007.
22. As regards ground 1, 2 & 3 of assessee's appeal, the Learned Counsel for the assessee has conceded before us that the common issue involved therein relating to disallowance of assessee's claim for deduction on account of write off of non-compete fees is squarely covered against the assessee by third member decision of the co- ordinate Bench of this Tribunal in assessee's own case for assessment year 1998-99 to assessment year 2001-02. He has submitted that the assessee, however, has taken this matter to the Hon'ble Bombay High Court, which is still pending. He has submitted that the issue involved in the year under consideration being identical with the question of law arising in the case of the assessee for earlier years i.e. assessment years 1999-2000 to assessment year 2001-02 which is pending before the Hon'ble Bombay High Court, the assessee has filed a declaration as required by the provisions of section 158A(1) which may be taken into consideration. Accordingly we decide this issue against the assessee following the decision of the Tribunal in the assessee's own case for assessment years 1998-99 to assessment year 2001-02 with the right to the assessee to seek amendment of this order, if necessary, so as to bring the same in conformity with the decision of the Hon'ble High Court on the identical question of law when the same becomes final for assessment years 1998-99 to assessment year 2001-02. Ground 1, 2 and 3 of assessee's appeal are accordingly dismissed.
23. As regards ground No. 4 and 5, the Learned Counsel for the assessee has conceded the common issue raised therein relating to the disallowance of assessee's claim for deduction u/s 35D on account of share issue and debenture expenses is squarely covered against the assessee. He has submitted that the issue involved in the year under consideration being identical with the question of law arising in the case of the assessee for earlier years i.e. assessment years 1999-2000 to assessment year 2001-02 which is pending before the Hon'ble Bombay High Court, the assessee has filed a declaration as required by the provisions of section 158A(1) 13 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 which may be taken into consideration. Accordingly, we decide this issue against the assessee following the decision of the Tribunal in the assessee's own case for assessment years 1998-99 to assessment year 2001-02 with the right to the assessee to seek amendment of this order, if necessary, so as to bring the same in conformity with the decision of the Hon'ble High Court on the identical question of law when the same becomes final for assessment years 1998-99 to assessment year 2001-02. Ground 4 and 5 of assessee's appeal are accordingly dismissed.
24. As regards ground No.6, the Learned Counsel for the assessee has conceded that the issue raised therein regarding to assessee's claim for inclusion of interest on FDRs and interest on statutory deposits in the profits for deduction u/s 80HHC is also squarely covered against the assessee by the decision of the Tribunal in assessee's own case for assessment years 1998-99 to assessment year 2001-02. Respectfully following the said decision of the Tribunal, we uphold the impugned order of Learned CIT (A) on this issue and dismiss ground no.6 of the assessee's appeal.
25. As regards ground No. 7 relating to the assessee's alternative claim for inclusion of only net interest income from the profits eligible for deduction u/s 80HHC, the Learned Counsel for the assessee has relied on the decision of Special Bench of ITAT Delhi in the case of Lalsons Enterprises vs DCIT reported in 89 ITD 25. He has contended that this issue may, therefore, be restored to the file of the Assessing Officer for examining the claim of the assessee for netting off interest income keeping in view the said decision of the ITAT. The Learned Departmental Representative, on the other hand, has relied on the decision of Hon'ble P&H High Court in the case of Rani Paliwal vs CIT 268 ITR 220, of Hon'ble Madras High Court in the case of CIT vs V Chinnapandi 282 ITR 389 and that of Hon'ble Delhi High Court in the case of CIT vs Shri Ram Honda Power Equip 289 ITR 475 and contended that for computing deduction u/s 80HHC, gross interest income is liable to be excluded from the eligible profits and not the net interest as sought to be claimed by the Learned Counsel for the assessee.
14 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
26. After carefully perusing the judicial pronouncements cited by both the sides, it is noted that although Hon'ble P&H High Court in the case of Rani Paliwal (supra) and Hon'ble Madras High court in the case of V Chinnapandi (supra) have held that the gross interest income is liable to be reduced from the profits of the business for computing deduction u/s 80HHC, the alternative claim of the assessee for netting off interest income against interest expenditure has been specifically considered on merit by the Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra). In the said decision, it was held by Hon'ble High Court after taking into consideration all the relevant aspects of the matter that the word "interest" in clause (baa) to Explanation to section 80HHC is indicative of "net interest" i.e. gross interest less the expenditure incurred by the assessee for earning such interest. Hon'ble Delhi High Court thus dissented from the P&H High Court decision in the case of Rani Paliwal vs CIT (supra) and also Madras High Court decision in the case of V Chinnapandi and affirmed the decision of Special Bench of Delhi in the case of Lalsons Enterprises (supra). Hon'ble Delhi High Court also laid down certain guidelines for deciding the issue relating assessee's claim for the benefit of netting off interest income as follows:
"(i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports.
(ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the "profits of the business", the Assessing Officer has to undertake a two-step exercise in the following sequence. He has to first "compute" the profits of the business under the head "Profits and gains of business or profession." In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof.
(iii) In arriving at profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the character of "income from other sources" which in any event are treated under sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC . The Assessing Officer will apply the law as explained in the judgments of the Kerala High c referred to above which have been affirmed by the hon'ble Supreme Court.
15 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007
(iv) Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC.
(v) Interest earned on fixed deposits for the purposes of availing of credit facilities form the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income.
(vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of section 37 of the Act, claim as deduction, expenditure laid out for the purposes of earning such business income.
(vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the had "Profits and gains of business or profession" the following sums in order to arrive at the "profits of the business"
for the purposes of section 80HHC(3):
(a) 90 per cent, of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 i.e., export incentive ;
(b) 90 per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and
(c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.
(viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e., gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 8 ITR 25 (Delhi) to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab and Haryana High Court in Rani Paliwal [2004] 268 ITR 220 and the Madras High Court in Chinnapandi [2006] 282 ITR 389 and affirm the ruling of the Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 89 ITD 25 (Delhi).
(ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from
16 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 section 37, will require to be shown by the assessee for application of the netting principle."
27. In our opinion, the decision of Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra) is directly in favour of the assessee on the issue under consideration and respectfully following the same, we set aside the impugned order of Learned CIT (A) on this issue and restore the matter to the file of the Assessing Officer to allow the assessee's claim for benefit of netting of interest income keeping in view the guidelines laid down by Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra). Ground no.7 of the assessee's appeal is accordingly treated as allowed.
28. Ground No. 8 relates to the assessee's claim for inclusion of services charges amounting to Rs 3,61,009/- and profit on sale of assets amounting to Rs 1,33,445/- in the profits eligible for deduction u/s 80HHC.
29. At the time of hearing before us, the Learned Counsel for the assessee has relied on the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co 260 ITR 371 to contend that the amounts in question received by the assessee being part of its operational income, the same were liable to be included in the profits eligible for deduction u/s 80HHC. In the said decision, it was held by the Hon'ble Bombay High Court that other income forming part of assessee's operational income cannot be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC as per Explanation (baa) to that section. It was also held that no standard test for deciding what would constitute the operational income of the assessee can be laid down and in every case, the Assessing Officer will have to ascertain whether the other income forms part of operational income of the company after taking into consideration the nature of the business, the nature of the activity and such other tests. It was also observed by Hon'ble Bombay High Court in this context that the Assessing Officer will have to ascertain as what is dominant business of the assessee-company and whether the other income accrues to the assessee as a part of the main business activity or whether they accrue out of incidental business.
17 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 It is observed in this context that the amounts in question were held to be not includible in the profits of the business for the purpose of computing deduction u/s 80HHC by Learned CIT (A) after taking into consideration the nature of assessee's business as well as the nature of receipts in question and on such consideration, he held that the service charges etc. received by the assessee were not forming part of its operational income. At the time of hearing before us, the Learned Counsel for the assessee has not been able to raise any material contention to rebut or controvert these observations recorded by Learned CIT (A) while disallowing the claim of the assessee for inclusion of service charges etc. in the profits of business for the purpose of computing deduction u/s 80HHC. These being so and keeping in view the decisions of Hon'ble Bombay High Court in the case of K K Doshi & Co (supra) and Bombay Clothing Co (supra) relied upon by Learned CIT (A), we find no infirmity in the order of Learned CIT (A) holding that the service charges etc. not being part of operational income of the assessee were liable to be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC. His impugned order on this issue is, therefore, upheld dismissing ground 8 of the assessee's appeal.
30. As regards ground No. 9 relating to the assessee's claim for reduction of only the net income from service charges etc from the eligible profits for the purpose of computing deduction u/s 80HHC, we direct the Assessing Officer to examine the claim of the assessee for deduction on account of expenses, if any, incurred for earning the income from service charges etc. and accordingly take only the net income for exclusion from the profits of the business for the purpose of computing deduction u/s 80HHC. Ground no.9 of the assessee's appeal is treated as allowed for statistical purposes.
31. As regards ground No.10 to 13 of the assessee's appeal, it is observed that the issue involved therein relating to the assessee's claim for not excluding the deduction allowable u/s 80IB from the profit for the purpose of deduction u/s 80HHC is squarely covered against the assessee by the decision of Special Bench of ITAT at Delhi in the case of ACIT vs Hindustan Mint & Agro Products (P) Ltd 119 ITD 107. Respectfully following the said decision of Bench of ITAT, we uphold the impugned order of 18 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 Learned CIT (A) on this issue and dismiss ground no. 10 to 13 of the assessee's appeal.
32. Ground Nos. 14 to 16 raised in the assessee's appeal have not been pressed by the learned counsel for the assessee keeping in view that the learned CIT(A) has already allowed relief to the assessee on the issues raised therein. The same are accordingly dismissed as not pressed.
33. As regards ground No. 17, 18 & 19 of the assessee's appeal, it is observed that the relief sought therein on the issues relating to depreciation on obsolete computers as well as depreciation on expenses incurred on foreign travel and interest on borrowings in relation to purchase of plant and machinery has already been given by the learned CIT(A) in his impugned order by directing the A.O. to consider the said claims of the assessee passing order u/s. 154. These grounds therefore do not survive and the same are accordingly dismissed.
34. As regards ground No. 20, it is observed that the issue raised therein relating to levy of interest u/s. 234D is squarely covered in favour of the assessee by the decision of the Special Bench of ITAT at Delhi in the case of Ekta Promoters reported in 113 ITD 719 wherein it was held that the provisions of section 234D having been brought on Statute on 1.6.2003 will be applicable only with effect from A.Y. 04-05 and such interest therefore could not be charged for earlier years. Respectfully following the said decision of the ITAT, we direct the AO to cancel the interest levied u/s. 234D and allow ground No. 20 of the assessee's appeal.
35. Now, we shall take up the appeal of the Revenue for A.Y. 03-04 being ITA No. 2518/M/07. At the time of hearing before us, the ld. Representatives of both the sides have agreed that the issue raised in ground No. 1 of the said appeal relating to assessee's claim for deduction u/s. 80IB in respect of service charges and rent received from employees is squarely covered against the assessee by the decision of Hon'ble SC in the case of Liberty India Ltd. reported as 317 ITR 218. Respectfully following the said decision of the Hon'ble Supreme Court, we set aside impugned 19 The Paper Products Ltd ITA 798/M/2007 ITA 1645/M/2007 ITA 1705/M/2007 ITA 2518/M/2007 order of the ld. CIT (A) giving relief to the assessee on this issue and direct the A.O. to recompute the deduction u/s. 80IB. Ground No. 1 of the Revenue's appeal is accordingly allowed.
36. As regards Gr. 2 of the Revenue's appeal, it is observed that issue raised therein relating to assessee's claim for exclusion of Excise duty and Sales tax from the total turnover for the purpose of computing deduction u/s. 80HHC is also squarely covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of Laxmi Machine Tools reported as 290 ITR 667. Respectfully following the said decision of the Hon'ble Apex Court, we uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and dismiss ground No. 2 of the Revenue's appeal.
37. In the result, both the appeals of the assessee as well as the appeal of the Revenue for A.Y. 03-04 are partly allowed whereas the appeal of the Revenue for A.Y. 2002-03 is dismissed.
Pronounced in the Open Court today on the 12th day of January 2010.
Sd/- Sd/-
(R S PADVEKAR) (P M JAGTAP)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Date: 12th January 2010
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) - XVII, Mumbai.
4) The CIT-"C", Mumbai.
5) The D.R. "C" Bench, ITAT, Mumbai.
By order
/ / True Copy / /
Asstt. Registrar
Chavan* I.T.A.T., Mumbai
20 The Paper Products Ltd
ITA 798/M/2007
ITA 1645/M/2007
ITA 1705/M/2007
ITA 2518/M/2007
Sr.N. Episode of an order Date Initials Concerned
1 Draft dictated on Sr.PS
22.12.09,8.1.2010
2 Draft placed before author 05.01.10 Sr.PS
07.01.10,
11.1.2010
3 Draft proposed & placed before the second JM/AM
Member
4 Draft discussed/approved by Second Member JM/AM
5 Approved Draft comes to the Sr.PS Sr.PS
6 Kept for pronouncement on Sr.PS
7 File sent to the Bench Clerk Sr.PS
8 Date on which file goes to the Head Clerk
9 Date of dispatch of Order