Income Tax Appellate Tribunal - Hyderabad
Vijai Electricals Ltd.,, Hyderabad vs Assessee on 3 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 742/Hyd/2006
Assessment year : 2003-04
M/s. Vijay Electricals Ltd. Vs. ACIT
Hyderabad Circle-3(3)
PAN: AAACV7259B Hyderabad
Appellant Respondent
Appellant by: Shri S. Rama Rao
Respondent by: Shri V. Srinivas
Date of hearing: 03.11.2011
Date of pronouncement: 16.11.2011
ORDER
PER CHANDRA POOJARI, AM:
This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 15.6.2006 for the assessment year 2003-04.
2. The first ground in this appeal is with regard to disallowance of interest incurred on the capital borrowed for amorphous project
3. The learned DR strongly relied on the order of the Tribunal in the case of APR Ltd., Secunderabad in ITA No. 689/Hyd/2000 dated 26.11.2007 wherein the Tribunal held as under:
"18. In the case before us, the borrowed funds were admittedly used for purchasing new machineries and replacement of existing machineries. Therefore, there is a direct nexus between the borrowed funds and the utilisation/investment. The matter may be entirely different, in case the borrowed funds were mixed with 2 I.T.A No. 742/Hyd/2006 M/s. Vijay Electricals Ltd.
=================== assessee's own funds and it cannot be found out which funds were used for purchasing machineries. In view of the existence of nexus between the borrowed funds and their investment, in our opinion, the claim of the assessee cannot be allowed either under sec. 36(1)(iii) or under sec. 37(1) of the Income-tax Act. Moreover, the expenditure was incurred for the purpose of acquisition or establishing capital asset/profit making apparatus and not in the process of earning the profit. Therefore, the claim of the assessee cannot be allowed as revenue expenditure."
4. However, we are not able to appreciate the above argument of the learned DR since similar issue was considered by this Tribunal in assessee's own case in ITA No. 809/Hyd/2008 for A.Y. 2002-03. The Tribunal vide order dated 22nd July, 2001 held as follows:
"15. We have heard both the parties and perused the material available on record. Where the assessee borrows money for expansion of its existing business the interest is allowable u/s. 36(1)(iii) of the I.T. Act. However, when the money is borrowed besides existing business, moneys borrowed for setting up of a new activity or unit, we have to see whether the new activity or unit and the existing business constitute the "same business" or they are entirely separate and distinct business altogether. If it is entirely separate and distinct business the interest is not allowable unless the new unit goes into production. In the present case assessee is engaged in manufacturing and sale of Amorphous and CRGO transformers and their related products. Amorphous Metal is one of the main raw material for manufacturing of Amorphous transformers, which is being imported. The company in the process of backward integration commenced the setting up of the plant for manufacturing amorphous metal for its captive consumption at its existing manufacturing facilities at Rudraram, Medak District. In the assessment year under consideration assessee borrowed funds in the name of the company for setting of an Amorphous Metal Plant. The setting up of Amorphous Metal Plan cannot be said that it is a 3 I.T.A No. 742/Hyd/2006 M/s. Vijay Electricals Ltd.
=================== different unit from the existing unit. Further, in our opinion, the test for unity of control and common management is existing since the Amorphous Unit was controlled by same management. Further there was interlacing and interrelated fund and administration.
16. In the case of Standard Refinery & Distillery Ltd. (79 ITR 9) the Hon'ble Supreme Court has laid down the principles which should be considered in determining whether two lines of business constitute the "same business". Those principles are inter-connection, interlacing, inter-dependent and unity furnished by the existence of common management, common business organisation, common administration, common fund and common place of business. In the present case the Amorphous Metal Plant is part and parcel of same management controlled by same board of directors and headed by single managing director. The funds for all the divisions are common. As narrated by the learned AR, business is carried on at common place at Plot No. 28, IDA, Balanagar, Hyderabad-500 037. The product manufactured by Amorphous Metal Plant is for captive consumption at its existing manufacturing unit since Amorphous metal is one of the raw materials for manufacturing of Amorphous Transformers. Being so, this is nothing but ancillary unit of the assessee for facilitating smooth functioning of the assessee's unit. Being so, it is not possible to hold that Amorphous Metal Plant is independent and distinct unit. In our opinion, this unit is inter-dependent with the main unit of the assessee and it is to be treated as an extension of the assessee's existing line of business and as a new unit. Accordingly, the interest incurred on the borrowing to set up Amorphous Metal Plant is to be allowed as revenue expenditure. This ground of the Revenue is dismissed."
5. In view of the above order of the Tribunal in assessee's own case, we are inclined to decide the issue in favour of the assessee. Accordingly, this ground raised by the assessee is allowed.
6. The next ground in this appeal is that the CIT(A) erred in excluding the following amounts :
4 I.T.A No. 742/Hyd/2006
M/s. Vijay Electricals Ltd.
===================
S. No. Description Amount (Rs.)
1. Testing fees 31,03,891
2. Testing charges received 5,35,000
3. Balances written back 11,563
4. Job work charges 1,03,23,300
5. Transformer repair and 19,98,274
labour charges
6. Bond violation amount 1,50,000
received from employees
7. Penalty received 11,353
8. Others 6,047
1,61,39,428
7. We have heard both the parties and perused the material available on this issue. The above mentioned items cannot be considered as income out of exports which is entitled for deduction u/s. 80HHC. Clause (baa) of Explanation to section 80HHC is applicable in respect of the above items. Being so, the lower authorities are justified in excluding the above income while computing the deduction u/s. 80HHC. Our view is fortified by the judgment of the Supreme Court in the case of CIT vs. K. Ravindranathan Nair (295 ITR 228) wherein the Apex Court held as under:
"The formula in section 80HHC(3) provided for a fraction of export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in clause (baa) of the Explanation. Profit incentives like rent, commission, brokerage charges, etc., though they formed part of the gross total income, had to be excluded as they were "independent income" which had no element of export turnover. All the four variables in the section were required to be kept in mind. If all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include the element of export turnover.
Clause (baa) of the Explanation states that 90 per cent of the incentive profits or receipts by way of 5 I.T.A No. 742/Hyd/2006 M/s. Vijay Electricals Ltd.
=================== brokerage, commission, interest, rent charges or any other receipt of like nature included in business profits have to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out the formula and in order to avoid distortion in arriving at the export profits clause (baa) stood inserted to say that although incentive profits and" independent incomes" constituted part of the gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover.
Processing charges which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and, therefore, 90 per cent of the processing charges has also to be reduced from the gross total income to arrive at the business profits and, therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of clause (baa) of the Explanation to section 80HHC(3).
While arriving at the export profits under section 80HHC(3) as it stood in the assessment year 1993-94 processing charges are to be included in the total turnover."
8. In view of the above judgement of the Supreme Court, we are inclined to decide the issue against the assessee.
9. In the result assessee's appeal is partly allowed.
Order pronounced in the open court on 16th December, 2011.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 16th December, 2011 6 I.T.A No. 742/Hyd/2006 M/s. Vijay Electricals Ltd.
=================== Copy forwarded to:
1. M/s. Vijay Electricals Ltd., c/o. M/s. PVRK Nageswara Rao & Co., 109, Metro Residency, RajbhanvanRoad, Khairatabad, Hyderabad-500 082.
2. Asst. Commissioner of Income-tax, Circle-3(3), Hyderabad.
3. The CIT(A)-IV, Hyderabad.
4. The CIT-III, Hyderabad.
5. The DR - A Bench, ITAT, Hyderabad tprao