Madras High Court
Commissioner Of Income Tax vs M/S. Rane Engine Valves Ltd on 19 November, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam
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IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 19.11.2018
CORAM :
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MR. JUSTICE N.SATHISHKUMAR
Tax Case Appeal No. 1168 of 2008
Commissioner of Income Tax
Chennai.
.... Appellant
-vs-
M/s. Rane Engine Valves Ltd.,
“Maithir” 132, Cathedral Road,
Chennai – 600 086.
...Respondent
Tax Case Appeal under Section 260A of the Income Tax Act,
1961 against the order of the Income Tax Appellate Tribunal Madras 'B'
Bench, dated 15.02.2008 in ITA No.1448/Mds/07 for the Assessment
year 2003-04.
For Appellant : Mrs.R.Hemalatha
For Respondent : Mr.Vijaya Raghavan for
Subbaraya Aiyar Padmanabhan
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Judgement of the Court was delivered by T.S.Sivagnanam, J
This appeal by the Revenue filed under Section 260A of the
Income Tax Act, 1961 (for brevity, the Act) is directed against the
order of the Income Tax Appellate Tribunal Madras 'B' Bench, dated
15.02.2008 in ITA No.1448/Mds/07 for the Assessment year 2003-04.
2.Heard Mrs.R.Hemalatha, learned Counsel for the Revenue
and Mr.Vijaya Raghavan for M/s.Subbaraya Aiyar Padmanabhan, the
learned Counsel for the respondent.
3.This Appeal have been admitted on 22.08.2008, on the
following Substantial Question of Law:
"Whether in the facts and in the
circumstances of the case, the Tribunal was right
in law in holding that the interest income in toto
forms part of eligible business profits for the
purpose of deduction under Section 80HHC and
only 90% has to be excluded from the business
profits?”
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4.The learned counsel for the respondent/assessee submitted
that tax effect is less than Rs.30,000/- and therefore, it is clearly hit
by Circular No. 3 of 2018 dated 11.07.2018 issued by Central Board of
Direct Taxes.
5.Mrs. R.Hemalatha, the learned Senior Standing Counsel for
the appellant/Revenue submits that though the tax effect is less than
the threshold limit hit by Circular No. 3 of 2018, it is hit by the
exceptional clause mentioned in paragraph 10(c) of the Circular. In
the light of the said submission, we took up the appeal for hearing on
merits.
6.The short issue, which falls for consideration, is whether
the Tribunal was right in holding that the interest income in toto forms
part of eligible business profits for the purpose of deduction under
Section 80HHC of the Act and only 90% has to be excluded from the
business profits by applying Explanation (baa) to Section 80HHC of the
Act.
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7. The Commissioner of Income Tax (Appeals) [for brevity the
CIT(A)], while allowing the assessee's appeal vide order dated
26.02.2007, stated that the assessee derived income from deposits
made with the banks for the purpose of obtaining Letter of Credit,
Bank Guarantee and other such related services from the bank.
Therefore, the assessee's contention that the interest of income
partook the character of business income and accordingly, as per
Clause (baa) of the Explanation to Section 80HHC of the Act, 90%
interest income is to be excluded from the assessee's eligible business
profits instead of its exclusion as a whole. This submission made by
the authorized representative of the assessee was accepted by the
CIT(A) and applying decision of the Hon'ble Supreme Court in the CIT
Vs. Karnal Cooperative Sugar Mills Ltd. [reported in 243 ITR 2],
directed the Assessing Officer to exclude 90% of interest income from
the assessee's eligible business profits for the purpose of quantification
of deduction under Section 80HHC of the Act.
8.The Tribunal confirmed the order passed by the CIT(A) and
in doing so, referred to the decision of the Division Bench of this Court
in the case of CIT Vs. V.Chinnapandi [reported in (2006) 153
TAXMAN 233].
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9. After hearing the learned counsel for the parties, we are of
the view that the CIT(A) did not endeavour to make an exercise as to
whether the deposits made with the banks were exclusively for the
purpose of obtaining Letter of Credit, a principal condition imposed by
the bank and that Letter of Credit was required by the assessee for the
purpose of its business.
10. More or less, an identical question was considered by this
Court, to which, one of us (TSSJ) was a party, in the case of Arul
Mariammal Textiles Limited Vs. ACIT [TCA No. 909 of 2008
dated 07.08.2018]. This Court, after taking note of the various
decisions on the point, held with the assessee in the said case
furnished the fixed deposit, which was a principal condition to enable
the assessee to open a Letter of Credit for the purpose of import of
critical components for manufacture of windmill and it was not the case
of the Revenue that the amount was deposited in fixed deposits solely
for the purpose of earning interest nor it was the case of the Revenue
that the amount, which was deposited, in fixed deposits was surplus
money, which was lying idle in the hands of the assessee. In the facts
of the said case, this Court came to the conclusion that the whatever
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income accrued is merely incidental and not the prime purpose of
doing the act in question, which resulted in accrual of some additional
income and therefore, the said income is not liable to be claimed as
deduction. To apply the decision in the case of Arul Mariammal
Textiles Limited, we are required to have the full facts. However, the
same is absent in the assessment order as well as in the order passed
by the CIT(A).
11. Mrs.R.Hemalatha, places reliance on the Division Bench
of Delhi High Court in the case of the CIT Vs. Cosmos International
[reported in (2009) 318 ITR 314]. In the said decision, the Delhi
High Court relied upon another decision of the same High Court in the
case of CIT Vs. Sri Ram Honda Power Equip [reported in (2009)
289 ITR 475], wherein the Court held that whether surplus funds are
parked with the bank and interest is earned thereon, it can only be
categorized as income from other sources. Further, it was pointed out
that the interest earned on fixed deposit for the purpose of having
credit facilities from 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.
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12. In the case on hand, the question would be whether the
deposits made by the assessee with the banks had an immediate
nexus with the business. Since the facts are not placed before us, we
are of the view that the matter requires to be re-adjudicated afresh,
for which purpose, the Assessing Officer should take a fresh look into
the matter.
13. The learned counsel appearing for the respondent/
assessee submitted that in the event the matter is being remanded to
the Assessing Officer, the assessee should be in a position to canvass
the point that 90% of the net interest, which has been included in the
profits of the assessee and is computed under head profits and gains
of business or profession alone should be taken and not on gross
interest to be taken under Clause (1) of Explanation (baa) to Section
80HHC of the Act for determining the profit of the business.
14. In this regard, reliance is placed on the decision of the
Hon'ble Supreme Court in the case of ACG Associated Capsules (P)
Ltd., Vs. CIT [reported in (2012) 247 CTR 0372].
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15. In the light of the findings which we have recorded in the
preceding paragraphs, we are of the firm view that the matter requires
a fresh adjudication and a fresh look by the Assessing Officer by
thoroughly examining the factual position and bearing in mind the legal
position pointed out in the preceding paragraphs. During the course of
such proceedings it is open to the assessee to place all their
submissions including the submission based on the decision in the case
of ACG Associated Capsules (P) Ltd.
16. For the above reasons, the appeal filed by the Revenue is
allowed, the order passed by the Tribunal as well as the CIT(A) are set
aside, the assessment order dated 31.01.2006, on this particular head
alone namely, the entitlement for deduction under Section 80HHC of
the Act is set aside and the matter is remanded to the Assessing
Officer for a fresh consideration to proceed in accordance with law in
the manner indicated above. No costs.
[T.S.S., J.] & [N.S.K., J.]
19.11.2018
mrm
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To
The Income Tax Appellate Tribunal Madras 'B' Bench.
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T.S.Sivagnanam, J.
and N.Sathishkumar, J.
mrm T.C.A.Nos.1168 of 2008 19.11.2018 http://www.judis.nic.in