Income Tax Appellate Tribunal - Delhi
Taj International Jewellers, , New ... vs Department Of Income Tax on 13 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'H' : NEW DELHI)
BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
I.T.A. 3032/Del./2010
(Assessment Year : 2007-
2007-08)
DCIT, Circle 33(1), Vs. M/s Taj International Jewellers
Jewellers
New Delhi. 16/7 WEA, Karol Bagh,
New Delhi.
(PAN/GIR No. : AACFT2729F)
(Appellant) (Respondent)
Assessee by : Shri K. Sampath, Adv.
Revenue by : Shri K. Ravi Rama Chandran, Sr.DR
ORDER
PER A.D. JAIN, JM
This is department's appeal for assessment year 2007-08 contending that the CIT(A) has erred in allowing the benefit of netting of interest paid by the assessee on borrowings for business purposes against the interest income on FDRs which falls under the head "income from other sources".
2. The assessee firm is a 100% export oriented unit engaged in the business of manufacture and export of gold and diamond jewellery. The deduction u/s 10B of the I.T. Act has been claimed in respect of its export operation from assessment year 2004-05 onwards during the assessment proceedings. During the year under consideration, the AO observed that the assessee had shown income of `79,17,223 as income from other sources, on account of net interest income received on FDRs after allowing the interest on borrowings made for the purposes of FDRs and the interest income paid to ban against the credit facilities provided to the assessee for business purposes. The AO observed that the assessee had deducted business expenses against I.T.A. No.3032/Del./2010 (A.Y. : 2007-08) interest income on FDRs whereas the latter was chargeable as "income from other sources". The assessee was as such, asked to explain as to why the gross interest income to be treated as income from other sources and the deduction for interest be not allowed under the head 'income from other sources'.
3. The assessee submitted that he FDRs were purely for the purpose of the assessee's business, with the aim to facilitate business and not to earn interest; that since the interest income had already been offered for taxation at the time of survey, only net interest be taxed as income taxable in the hands of the assessee as "income from other sources". The assessee relied on the decision of Hon'ble Delhi High Court in the case of Shri Ram Honda Equipment vs. CIT, 289 I.T.R. 475 and the decision of the Mumbai Bench of the Tribunal rendered on 12.5.2009, in I.T.A. No.187/Mum./2007 in the case of "Livingstones Jewellery Pvt. Ltd. vs. DCIT.
4. Relying on the decision of the Delhi Bench of the Tribunal in the assessee's own case for assessment year 2006-07, the AO disagreed with the submission of the assessee. The AO further relied on "M/s Cambay Electric Supply Industrial Co. Ltd. vs. CIT", 113 I.T.R. 84 (SC), "CIT vs. Sterling Foods", 237 I.T.R. 579 (SC) and "Hindustan Lever Ltd. vs. CIT", 239 I.T.R.297 (SC). It was held that since the term "derived from" is much narrower than the term "attributable to", deduction u/s 10B of the Act was allowable only on the eligible profits of the export business. The AO also observed that the gross interest income cannot be allowed deduction in respect of the interest expenses incurred relating to FDRs, which were acquired for the purposes of availing credit facilities, since there was no nexus between the earning of the interest and the interest expenditure, as the borrowings were not made for the purpose of investing in FDRs, but for availing the credit facilities, for which, the FDRs were mandatory and as such, the main 2 I.T.A. No.3032/Del./2010 (A.Y. : 2007-08) purpose was earning of interest. Therefore, the AO did not allow the claim of interest expenditure u/s 57 of the Act against the gross interest income received by the assessee on FDRs.
5. By virtue of the impugned order, the CIT(A) following the decision passed by the Delhi Bench of the Tribunal in the assessee's own case for assessment years 2005-06 and 05-06 held, inter alia, that the AO ought to have allowed the interest expenses against the interest income, so far as they were incurred for making and earning the interest income and that as such, the benefit of netting should be allowed while taxing the interest income under the head "income from other sources".
6. Aggrieved, the department is in appeal.
7. Challenging the impugned order, the Ld.DR has argued that the CIT(A) has erred in allowing the benefit of netting of interest paid by the assessee on borrowings for business purposes against the interest income on FDRs; that the interest income on FDRs comes under the head "income from other sources"; that the CIT(A) has erred in failing to consider the case laws cited in the assessment order.
8. On the other hand, Ld.Counsel for the assessee has placed reliance on the judgment dated 13.12.2010, passed by the Hon'ble Delhi High Court in the case of the assessee, for assessment year 2005-06.
9. In the aforesaid judgment, their Lordships have observed as under:
"The assessee herein is in the business of export of jewellery. In these two assessment years namely 2005-06 and 2006-07, it was found by the Assessing Officer that the assessee had taken a huge amount as loan on which interest was paid. It was also found that the assessee had converted the said loans in the FDRs and interest was received on the said FDRs. It so happened that 3 I.T.A. No.3032/Del./2010 (A.Y. : 2007-08) the interest earned on the FDRs was more than the interest which the assessee paid on the loans. The assessee had shown the interest earned on FDRs as 'income from other sources'. However, at the same time, the interest which was paid by the assessee to the bank on the loans was reduced from the interest earned on the FDRs. In this manner, netting of the interest was done by the assessee and the income shown under tihe head 'income other sources'. The Assessing Officer, however, disallowed the interest paid by the assessee to the banks on the borrowed amount on the ground that the 1oan was borrowed for business purpose and interest paid thereon should not be netted against the interest earned on the FDRs but should be allowed as deduction while computing the income from the head of 'income from business'. The assessee filed an appeal against this order before the CIT (A) which deleted the addition and. allowed the deduction of interest paid by the assessee to the bank on the borrowed funds under Section 57 (iii) of the Income-Tax Act. This order of the CIT (A) has been affirmed by the Tribunal.
2. In order to deal with this issue one will have to go in the peculiar nature of transaction entered into by the assessee. The assessee had given its detailed explanation to the Assessing Officer, inter alia, stating that it had borrowed a sum of ` 35.34 crores directly from the banks to make the FDRs i.e. to say on the one hand, and Bank advanced loan to the assessee and on the other hand, the same amount was converted into FDRs. The assessee had further explained that it did not invest fresh capital in the years in question. More so, the activity of import of gold on 360 days credit against letter of credit was permitted by the Government of India as per Import & Export Policy for the benefit of Exporters. The Exporters were benefited by scheme purely on the facts that there was a difference of rate of interest in India as against interest rate outside India which was payable i.e.LIBOR rate (London Inter Bank Rate). It was because of this peculiar nature of the transaction and the scheme of Government of India for the benefit of Exporters that the assessee earned more interest on the FDRs than the interest payable to the bank on the borrowed funds. It is not in dispute that the assessee intends to pay the tax on the extra interest earned on the said FDRs, what the assessee wanted to adjust there from the interest paid by it to the Bank against the borrowed funds. Section 57 (iiii) of the Act reads as under:-
"any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earnIng such income" .4
I.T.A. No.3032/Del./2010 (A.Y. : 2007-08)
3. The CIT (A) as well as ITAT have recorded a finding of fact that there was a clear nexus between the interest earned on the FDRs and the interest paid on loans utilized for purchase of FDRs and the intimate connection between the receipt and payment of interest stand established. It is not in dispute that the entire money was borrowed with the sole purpose of converting the same into FDRs and that was actually done as well. In these circumstances, we are agreed with the opinion of the authorities below. The interest paid had to be allowed under the provisions of Section 57 (iii) of the Act as the amount was borrowed for making and earning income, taking advantage of the EXIM policy of the Government of India as well as Iower LIBOR interest rate.
4. Therefore, we are of the view that no substantial question of law arises in the aforesaid background and these appeals are accordingly dismissed."
10. For assessment year 2005-06, by virtue of their order dated 13.12.10 (supra), the Hon'ble Delhi High Court, it is seen has held that since a clear nexus has been found by the Tribunal between the interest earned on the FDRs and the interest paid on the loans utilized for purchase of FDRs and the intimate connection between the receipt and payment of interest stood established; and that it was not disputed that the entire money was borrowed for the sole purpose of converting the same into FDRs and that this was what actually had been done, interest paid had to be allowed u/s 57(iii) of the Act. Since, the amount was borrowed for making and earning income, taking advantage of the EXIM policy of the Govt. of India as well as lower LIBOR interest rate.
11. The facts in the year under consideration, it is seen, are no different from those before the Hon'ble High Court for assessment year 2005-06. Therefore, finding no merit in the grievance sought to be raised by the department by way of the ground of appeal raised, the same is hereby rejected.
5I.T.A. No.3032/Del./2010 (A.Y. : 2007-08)
11. In the result, the appeal filed by the department is dismissed.
Order pronounced in open court on 04.04.2011.
Sd/- Sd/-
[K.D. RANJAN] [A.D. JAIN]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date April 04, 2011.
SKB
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT (A)-XXVI, New Delhi.
5. CIT( ITAT)
Deputy Registrar,
ITAT, Delhi Benches
6