Delhi High Court
Eicher Goodearth Ltd. vs Dy. Cit on 31 January, 2001
Equivalent citations: (2001)71TTJ(DEL)841
ORDER
Krishnan Swarup, A. M. This is an appeal by the assessed against the order of the Commissioner (Appeals), New Delhi, dated 2-11-1994, for the assessment year 1991-92.
2. The first two grounds of appeal, which relate to the same issue, read as under :
"1. That the Commissioner (Appeals), New Delhi has grossly erred on facts and in law in confirming the action of the assessing officer in restricting the claim for deduction under section 80HHC of the Income Tax Act, 1961 to Rs. 12,04,575 as against the appellants claim of Rs. 46,93,152.
2. That the Commissioner (Appeals), New Delhi has grossly erred on facts and in law in confirming the action of the assessing officer in excluding the amount of Rs. 76.85 lakhs on account of income from interest and dividend from the "Business Income" for the purpose of computing deduction under section 80HHC of the Income Tax Act, 1961."
3. The facts in brief are that the assessed had claimed deduction under section 80HHC at Rs. 46,83,152 with reference to profits of Rs. 1,03,46,194, which included, inter alia the following amounts :
(i) Income from bank interest Rs. 0.57 lakhs
(ii) Other income (interest on income-tax refund) Rs. 11.75 lakhs
(iii) Dividend from investments Rs. 64.53 lakhs Rs. 76.85 lakhs In the assessment for grant of deduction under section 80HHC, the assessing officer excluded the above income, on the premise that it was "other sources" income and hence not eligible for deduction under section 80HHC. Consequently, the deduction under section 80HHC stood reduced to Rs. 12,04,575. In appeal, the learned Commissioner (Appeals) upheld the action of the assessing officer.
4. Before us, the learned counsel for the assessed admitted that the interest income of Rs. 57,000 related to short-term deposit of surplus funds. It was however contended that the same was earned during the course of business and should, therefore, be taken into account while calculating deduction under section 80HHC of the Act. Relying on the decision of the Honble Delhi High Court in the case of Snam Progetti SPA v. Addl. CIT (1981) 132 ITR 70 (Del). It was submitted that interest on temporary deposit of surplus funds of business was also business income. A reference was also made of certain other judicial decisions, including the Tribunal Delhi Bench decision in the case of Asstt. CIT v. Brij Bhushan Lal & Ors. (2001) 19 DTC 45 (Del-Trib) (SN) : (2000) 69 TTJ (Del-Trib) 379. Without prejudice to the main argument that interest income should be taken as profits of the business for the purposes of grant of deduction under section 80HHC, it was submitted that the interest receipt should be adjusted against interest payment and only the net amount be included in the amount of profit under section 80HHC. In this connection also a reference was made of certain decisions of the Tribunal Benches.
4.2. About the interest on income-tax refund, relying on the Punjab & Haryana High Court decision in the case of R.B. Jodhamal Kuthiala v. CIT (1972) 83 ITR 464 (P&H) it was submitted that the same was liable to be taxed as business income.
4.3. Regarding dividend income of Rs. 64.53 lakhs, the submission of the learned counsel was that it included dividends of Rs. 61.43 lakhs from Eicher Tractors Ltd. (hereinafter referred to as the ETL). It was submitted that the assessed had vested interest in ETL and investment in shares was essential for safeguarding the source of income from business. It was pleaded that the dividend income to this extent was clearly relatable to business income.
5. The submission of the learned Departmental Representative was that income from interest on deposits, interest on income-tax refund and dividends was liable to be assessed under the head "income from other sources" and, if that was so, it was not eligible for deduction under section 80HHC of the Act. The learned Departmental Representative relied on the Apex Court decision in the case of CIT v. Sterling Foods (1999) 9 DTC 218 (SC) : (1999) 237 ITR 579 (SC) to submit that interest and dividend were not profits "derived" from export of goods. A reference was also made of the Kerala High Court decision in the case of Nanji Topanbhai & Co. v. Asstt. CIT (2000) 13 DTC 322 (Ker-HC) : (2000) 243 ITR 192 (Ker). Madras High Court decisions in the cases of South India Shipping Corporation Ltd. v. CIT (2000) 240 ITR 24 (Mad) and ACE Investments (P) Ltd. v. CIT (2000) 13 DTC 260 (Mad-HC) : (2000) 244 ITR 166 (Mad). assessed's plea for set off of interest receipts against interest payment was opposed on the strength of Apex Court decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC).
6. We have carefully considered the facts and circumstances of the case and the rival submissions. At the outset, we would like to point out that about the nature of interest income on short-term deposits and eligibility for deduction under section 80HHC, there is a cleavage of judicial opinion. Section 80HHC provides for deduction out of profits "derived from the export of goods or merchandise". In the case of Cambay Electric Supply Industrial Company Ltd. v. CIT (1978) 113 ITR 84 (SC) the Hon'ble Supreme Court has held that the expression, "derived from" should be given a restricted meaning. The above decision was followed by the Apex Court in the case of Ashok Leyland Ltd. v. CIT (1997) 224 ITR 122 (SC). The ratio of various judicial decisions is that income can be said to be "derived from" an activity if the said activity is the immediate and effective source of the said income. Income cannot be said to be derived from an activity merely by reason of the fact that the activity may have helped to earn the said income in an indirect or remote manner. Interest derived from deposit of surplus funds in fixed deposits with banks which has no direct nexus with the business activities of the assessed, is liable to be assessed under the head "other sources" and it cannot be said to have been derived from exports. The facts in the case of Snam Progetti SPA (supra) are distinguishable from assessed's case and, therefore, the jurisdictional High Court decision does not render any assistance to the assessed. About the other decisions, we have already stated above that there is a cleavage of judicial opinion. We have held a view that interest on surplus funds is not income derived from export of goods and hence not eligible for the deduction under section 80HHC. We will follow this view in the present case also. Ordered accordingly.
6.2. Insofar as the assessed's claim for set off of interest receipt against interest payment is concerned, we would add that there being no nexus or inextricable link between the borrowed funds and funds deposited in fixed deposits no such adjustment is permissible.
6.3. It is well-settled that interest paid under the various provisions of the Income Tax Act is not a business expenditure. On the same analogy, the interest received on refund of income-tax is not a business income, what to say of profit derived from export of goods. We may add that the Punjab & Haryana High Court decision in the case of R.B. Jodhamal Kuthiala (supra) is in the context of provisions of Excess Profits Tax Act and it has no application to assessed's case.
6.4. In our considered opinion, the dividend income which is assessable under the head "other sources" in view of specific provisions of section 56(1)(i) of the Income Tax Act cannot be held to be the business income and that too "derived from exports", merely because the investment in shares is stated to have been made for safeguarding the source of income from business.
7. In view of the aforesaid decision we would uphold the order of the learned Commissioner (Appeals) in disallowing deduction under section 80HHC on the two types of interest and dividends. The two grounds of appeal referred to above, are rejected.
8. The ground at Serial No. 3 reads as under :
"That the Commissioner (Appeals) I, New Delhi has grossly erred on facts and in law in confirming the action of the assessing officer in rejecting the claim for deduction of Rs. 5,39,893 being the loss on account of foreign exchange fluctuations resulting from the payments of foreign currency loans during the year to Hongkong & Shanghai Banking Corporation by invoking the provisions of section 43A of the Income Tax Act, 196l."
9. The facts concerning the matter, to be stated succinctly, are thus. In December, 1981, the assessed had entered into a management service agreement with M/s Eicher Germany, who were engaged in the manufacture of tractors, diesel engines, etc., for a very long time. The agreement was to continue for a period of 5 years. As per this agreement which was approved by the Ministry of Finance vide their letter dated 27-3-1982, the assessed was to manage the affairs of Eicher Germany. Vide their letter dated 28-12-1983, the Ministry of Commerce granted approval for participation of the assessed in the joint venture in West Germany by way of entering in the management service agreement with Eicher Germany for carrying out its business of manufacture and marketing of tractors, diesel engines, etc. The assessed was allowed to contribute 5 million DM in the German company towards its equity and the approval stipulated raising a foreign exchange loan of equivalent amount. The assessed-company obtained loan from Hongkong & Shanghai Banking Corporation amounting to DM 5 million and utilized the same for contributing towards the equity in Eicher Germany. up to assessment year 1988-89, the assessed was charging the exchange rate difference on repayment of loan Installments to the profit and loss account of the year in which the Installment was repaid and the same was allowed by the department as revenue loss. Meanwhile, in the previous year relevant to assessment year 1989-90, the assessed had switched over to mercantile system of accounting as per requirements of the Companies Act. Due to fluctuation in the rate of exchange, a sum of Rs. 5,39,893 was adjusted in the profit and loss account for the year under consideration. The assessing officer rejected the claim of the assessed on the ground that the loss had been incurred because the assessed had taken loan for purchase of capital asset. According to him, in view of provisions of section 43A, the amount by which the liability was increased or reduced was to be added to or, as the case may be, reduced from the actual cost of asset.
10. The case of the assessed before the learned Commissioner (Appeals) was that the deductibility would depend on the question whether the foreign currency loan was in connection with obtaining a capital asset or a trading asset. According to the assessed, the investment in shares of Eicher Germany, financed through loan, was made in order to increase exports to that company. Relying upon certain judicial decisions, it was submitted that as the investment in shares was made in the course of assessed's business, the loss on account of foreign currency fluctuation was allowable. Certain further facts in this behalf were also brought to the notice of the learned Commissioner (Appeals), including the fact that his predecessor had allowed the loss for the assessment year 1989-90. The learned Commissioner (Appeals) was, however, of the view that the assessing officer was correct in holding that the loss was with respect to a capital asset in the form of equity shares in the German company and as such not a revenue loss. He distinguished the facts of the judicial decisions relied upon by the assessed.
11. Before us, besides reiterating the plea advanced before the authorities below, the learned counsel for the assessed explained that the investment in Eicher Germany was lost as that company went into liquidation. He submitted that the loss was written off in the books of account relevant to assessment year 1985-86. However, the lower authorities and the Tribunal held in assessment year 1985-86 that the claim for business loss was "premature" in that year. It was stressed that thereafter the loss was allowed by the assessing officer in assessment year 1986-87. In this connection, our attention was invited to the statement of computation of total income for the assessment year 1986-87, in which such loss was claimed, copy placed at pp. 138 to 140 of the paper-book, and to the copy of the assessment order for that year, copy placed at pp. 145-46 of the paper-book. It was pleaded that this clearly showed that the investment in Eicher Germany was regarded as a business asset. He further submitted that till assessment year 1988-89, the exchange rate difference on repayment of the loan Installments was allowed as revenue loss. Further, due to change in the method of accounting in assessment year 1989-90, from cash to accrual, the assessed had provided for an aggregate amount of Rs. 152.78 lakhs as loss on account of foreign exchange fluctuation our of which Rs. 110.87 lakhs related to earlier years. It was submitted that the assessing officer accepted the change and allowed the entire debit of Rs. 152.78 lakhs while computing the income under the normal provisions of Income Tax Act. However, while computing the book profits under section 115J of the Act, the assessing officer added Rs. 135.13 lakhs (later rectified to Rs. 110.87 lakhs), on the ground that the loss on account of foreign exchange fluctuation was of capital nature and alternatively it related to earlier years. In appeal, the learned Commissioner (Appeals) vide her order dated 7-8-1992, copy placed at pp. 48 to 56 of the paper-book, held the loss on account of foreign exchange fluctuation to be a revenue loss. However, she upheld the alternative ground taken by the assessing officer that the loss pertaining to earlier years was required to be added back while computing the book profits under section 155J of the Act. It was emphasized by the learned counsel that insofar as the main finding of the learned Commissioner (Appeals) was concerned, it became final because the department accepted the order on that issue. The assessed had come in appeal before the Tribunal against the finding on alternative issue and the Tribunal vide its order dated 26-4-1999 in ITA No. 7078 Del 92 etc., Dy. CIT v. Eicher Goodearth (1999) 12 DTC 148 (Del-Trib) : (2000) 72 ITD 360 (Del-Trib) copy placed at pp. 57 to 92 of the paper-book, held that the learned Commissioner (Appeals) was not justified in upholding the action of the assessing officer in adjusting the books profit under section 115J by adding back the amount of loss due to foreign exchange fluctuations pertaining to earlier years, charged debited in the profit and loss account of the relevant previous year (para 6.42 of the order). The learned counsel submitted that the Tribunal has repeatedly taken note of the fact that the Commissioner (Appeals) had held the loss on account of foreign exchange fluctuation to be a revenue loss against which finding the department was not in appeal. In this connection. Paras 6.5 & 6.24 of the order was specifically referred to. The learned counsel also submitted that even in the subsequent assessment year 1990-91, loss of Rs. 14.30 lakhs claimed in the profit and loss account on account of foreign exchange fluctuation has been allowed by the assessing officer himself. In this connection, the relevant profit and loss account and assessment order dated 29-1-1993, copies placed at pp. 173 & 174-76, were referred to. It was argued that in the circumstances, the department could not take a different stand and disallow the loss of Rs. 5,39,893 relating to the year under consideration. It was reiterated that the courts have held that the deductibility of loss on account of exchange fluctuation depends upon the answer to the question whether the foreign exchange loan was for obtaining a capital asset or a trading asset. It is held that if the loan is taken in connection with obtaining a trading asset as was the position in the assessed's case, then the loss arising on account of fluctuation is a revenue loss. The Apex Court decision in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) was referred to. It was stressed that it has been accepted by the department that the shares in Eicher Company were held as business asset and if that was so, the exchange loss in respect of loans taken to finance the acquisition of such business asset cannot be said as being in the nature of anything other than the revenue expenditure. The Apex Court decision in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) was referred to for the proposition that if there is no change in the facts a different conclusion was not warranted.
12. We have given our utmost consideration to the whole gamut of facts and circumstances of the case, the material to which our attention was invited and the rival submissions. At the outset, we would like to record that the facts stated by the assessed have not been disputed by the learned Departmental Representative. To recapitulate, the loss arising from investment in Eicher Germany, after it went into liquidation, was allowed as a business loss in assessment year 1986-87, loss on account of foreign exchange fluctuation has in earlier years been accepted as a business loss and in assessment year 1989-90 deduction has been allowed by the Tribunal. In the subsequent assessment year 1990-91 deduction for the same has been allowed by the assessing officer himself. No new facts or material has been brought on record to disallow the claim in the year under consideration. It is true that the strict rule of the doctrine of res judicata does not apply to proceedings under the Income Tax Act but at the same time it is equally true that unless there is a change of circumstances, the authorities will not depart from previous decisions at their sweet will in the absence of material circumstances or reasons for such departure. Thus, the rule of consistency which applies to income-tax proceedings has to be followed. When so done, there would be no room for disallowing the assessed's claim for deduction of loss of Rs. 5,39,893 on account of foreign exchange fluctuation. The ground is allowed in favor of the assessed.
13. The ground at Serial No. 4 reads as under :
"That the Commissioner (Appeals)-I, New Delhi has grossly erred on facts and in law in confirming the action of the assessing officer in holding that amount received on surrender of tenancy rights amounting to Rs. 6,83,017 as a casual and non-recurring receipt under section 10(3) of the Income Tax Act, 1961, instead of a capital receipt not chargeable to tax. "
14. An amount of Rs. 6,83,017 received by the assessed on surrender of tenancy rights was assessed by the assessing officer as a casual and non-recurring receipt assessable under section 10 of the Income Tax Act, 1961. In doing so, reliance was placed on the Allahabad High Court decision in the case of CIT v. Gulab Chand (1991) 192 ITR 495 (All). In appeal, the learned Commissioner (Appeals) upheld the action of the assessing officer.
15. The learned counsel for the assessed, referred to certain decisions of the High Court. He placed strong reliance on the Tribunal Delhi (Sepcial Bench) decision in the case of J. C. Chandiok v. Dy CIT (1999) 64 TTJ (Del) (SB) : (1999) 69 ITD 75 (Del) (SB) to plead that the amount received on surrender to tenancy rights was a capacity receipt not liable to tax. It was also submitted that the aforesaid decision of the Special Bench has been followed by the Tribnal B Bench, New Delhi in assesseds own case for the assessment year 1994-95 in ITA No. 1125/Del/99, dt. 27-10-1999, a copy of which was filed.
16. Learned Departmental Representative was heard.
17. Respectfully following the precedent, there being no change in the facts and circumstances of the case, we hold that receipts on surrender of tenancy rights are exempt from taxation. Accordingly, the addition of Rs. 6,83,017 is deleted.
18. The grounds at Sr. No. 5 and 6 are general in nature and do not require any adjudication.
19. In the result the appeal is party allowed.