Income Tax Appellate Tribunal - Mumbai
Suizer Pumps India Ltd. vs Joint Cit on 26 October, 2005
Equivalent citations: [2006]7SOT533(MUM)
ORDER
T.K. Sharma, J.M. This appeal filed by the assessee is directed against the order dated 27-12-2001 of the learned Commissioner (Appeals)-C, Mumbai pertaining to the assessment year 1998-99.
2. Ground Nos. 1, 2 & 3 read as under
"1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the disallowance of the sum of Rs. 10,42,800 representing Employer's contribution to PF and FPD etc., under section 43B of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). He ought not to have done so.
2. Without prejudice to Ground No. I above, the learned Commissioner (Appeals) has erred in confirming the disallowance of PF, administrative charges of Rs. 67,364, EDLI payments of Rs. 38,296 and Rs. 767 included in Rs. 10,94,920 by holding this to be contribution to PF, EPF etc. He ought not to have done so.
3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the disallowance of the sum of Rs. 9,32,548 under section 36(1)(va) by holding the same as representing employee's contribution. He ought not to have done so."
3. We have heard both the sides. The amount of Rs. 10,42,800 including administrative charges and employer's contribution have been paid within the financial year and in any case before the time limit for filing the return of income under section 139(1). The administrative charges which are contested in Ground No. 2 are not hit by the provisions contained in section 43B. It is, therefore, claimed that disallowance are not justified. In our view the administrative charges are not hit by provisions contained in section 43B. Further after deletion of 2nd proviso to section 43B and amendment of the first proviso, all payments which have been made before due date for filing the return of income are to be allowed. This view has been taken by various Benches of Mumbai ITAT. Therefore, to the extent payments relate to the employer's contribution, the disallowance is directed to be deleted. Ground Nos. I & 2 are accordingly allowed.
3.1 Regarding employees' contribution, in our view, section 43B is not applicable at all and the assessee's claim has to be considered under section 36(l)(va) reads as under :-
"Any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.
Explanation-For the purpose of this clause, 'due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise."
From the above it is clear that if the payments are made beyond the due date prescribed under the relevant Act, such payments are not deductible by virtue of the provisions of section 36(1)(va). Admittedly, these payments have been made beyond the prescribed time limit. Therefore, the disallowance with regard to payment of employees' contribution is confirmed.
4. Ground No. 4 reads as under
"On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in curtailing the deduction under section 80HHC by reducing the following amounts from adjusted business profits
(i) 90% of service charges of Rs. 8,32,458 i.e., Rs. 7,49,212 and
(ii) 9096 of interest received of Rs. 5,48,716 i.e., Rs. 4,93,644"
5. The assessing officer curtailed deduction under section 80HHC by deducting 90% of the service charges and interest received from the profits in order to determine "profit of the business". For this curtailment, the assessing officer stated that income which is not derived from business of export do not qualify for deduction under section 80HHC in view of decision of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC). Before the Commissioner (Appeals), the assessee pleaded that service charges of Rs. 8,32,458 are liable to be left over of the purview of the Explanation "bad of section 80HHC of the Act, in order to determine "profits of the business". The interest income as well as service charges is part of the business income, therefore, 90% of the same should not be excluded. In the impugned order, the Commissioner (Appeals) upheld the action of the assessing officer on the ground that services rendered by the appellant could not be related to any "business turnover" or export activity undertaken by the assessee-company. The Commissioner (Appeals) further observed that the assessee-company is exporting the manufactural pumps, but the service charges are entirely related to activity undertaken in India. The formula of computation of exemption provided under section 80HHC shall give a distorted figure of export profit, if receipts of service charges are included as profits of the business therein. It is also admitted that service charges received by the assessee-company has no direct nexus with the export activity. The Commissioner (Appeals) accordingly following the decision of the Bombay High Court in the case of CIT v. Kantilal Chhotalal (2000) 246 ITR 439 (Bom) upheld the action of the assessing officer in excluding 90% of the service charges, for determining deduction under section 80HHC. The other contention of the assessee regarding non-exclusion of 90% of interest is also rejected by the Commissioner (Appeals) relying on the decision of the Bombay High Court in the case of CIT v. Ravi Ratna Exports (P) Ltd (2000) 246 ITR 443 (Bom.).
6. At the time of hearing, the Id. Counsel for the assessee relied on the decision of the ITAT Delhi Bench (SB) in the case of Lalson Enterprises v. CIT (2004) 89 ITD 25 (Del) for the proposition of calculating the business profits for the purpose of business under section 80HHC. She further relied on the judgment of the Bombay High Court in the case of CIT v. Bangalore Clothing Co. (2003) 260 ITR 371 (Bom), wherein, it is held that service charges and interest income are part and parcel of operating profit and have to be considered as business profit. In support of this, reliance was also placed on following decisions of Co-ordinate Benches :
(i) ITAT 'I;' Bench order dated 29-9-2004 in the case of Audeo India Ltd v. DCIT
(ii) ITAT 'B;' Bench order dated 5-4-2004 in the case of Assistant Commissioner v. Ewas Alloys Ltd.
7. On the other hand, the learned Department Representative supported the orders of the authorities below. The learned Department further submitted that the assessee has provided after sales, services, therefore, amount of Rs. 8,32,458 cannot be treated as part of turnover. Further 90% of interest income is also correctly excluded by the assessing officer.
8. After hearing both the sides, we have carefully gone through the orders of the authorities below. The Bombay High Court in the case of Kantilal Chhotalal (supra) observed that "a reading of clause (b) and clause (ba) of the Explanation clearly indicates that the Legislature has brought on par the components of export turnover and sale turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits.
Therefore, the numerator and the denominator are required to have a common element which is the sale proceeds. In fact by the proviso in clause (ba) to the Explanation, it is further provided that the expression 'total turnover' shall have effect so as to exclude section 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a licence granted under the Import (Control) order, cash assistance, duty drawback, etc. This exclusion also shows that the Legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity. Hence, total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature.
8.1 Subsequently, the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (supra) held that the assessing officer himself ascertain the nature of receipt. If labour charges found to be part of operational income, same cannot be excluded under Explanation (baa) to section 80HHC. The relevant extract from the head notes of the decision which was reproduced by the Tribunal in two decisions relied by the Id. Counsel for the assessee, is reproduced as under :-
"Explanation (baa) to section 80HHC of the Income Tax Act, 1961 was inserted by the Finance (No. 2) Act, 1991, with effect from 1-4-1992. Under that Explanation "profits of the business" for the purposes of section 80HHC does not include receipts, which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent deduction from such incomes is provided for, to account for those expenses. In every matter, the assessing officer will have to ascertain whether the receipt of interest, commission, labour charges, etc., was a part of operational income. No standard test for deciding what would constitute operation income can be laid down. Broadly, the department will have to consider the memorandum and articles of association of the company, the nature of the business, the nature of the activity and such other tests. The department will also have to ascertain as to what is the dominant business of the company and whether the receipts like interest, commission, etc., accrue as a part of the main business activity or whether they accrue out of incidental business."
It is pertinent to note that the Hon'ble Bombay High Court in the case of CIT v. K.K. Doshi & Co. (2000) 245 ITR 849 (Bom) held that service charges of Rs. 19.64 lakhs did not have the element of turnover because the charges were received for seizural activity which was not an integral part of manufacturing activity. In this case, it is not known whether the assessing officer has included the service charges amounting to Rs. 8,32,458 in total turnover. In case the services are includible in the total turnover, in that event, an income from that source will fall outside the Explanation (baa). This needs verification at the end of the assessing officer. We, therefore, set aside the order of the learned Commissioner (Appeals) and restore this issue back to the file of the assessing officer with the direction that the assessing officer should carry out necessary verification and re-adjudicate this issue afresh keeping in view the decision of the Bombay High Court in the case of Bangalore Clothing Co. (supra).
8.2 In respect of interest income, we found that the assessee is not engaged in the business of money lending. The interest income is therefore, by no stretch of imagination accrue by way of operating income and as such, it will fall within the Explanation (baa) to section 80HHC. However, as per the decision of the Delhi ITAT (SB) in the case of Lalson Enterprises (supra) if the assessee can establish the nexus then only the net interest should be considered for the purpose of clause (baa) of section 80HHC. But if the assessee is not in a position to establish the nexus, the gross interest should be considered and the burden is on the assessee to prove the nexus. This issue is accordingly, remitted to the file of the assessing officer.
9. The last ground of appeal is as under
"On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the disallowance of the deduction under section 80-1 which refers to following income:
(a) service charges of Rs. 8,32,458
(b) Interest of Rs. 5,48,714"
10. Having heard both the sides, we have carefully gone through the orders of the authorities below. In our view, the Commissioner (Appeals) rightly held that service charges and interest income is not derived from industrial undertaking. For this reliance can be placed on the judgment of the Apex Court in the case of Sterling Foods (supra). The interest income of the assessee consists of two parts. The assessee-company is getting interest income on F.D.'s of Rs. 5,12,780 and interest from employees of Rs. 35,936. Both these components of interest have no direct nexus with the industrial activities of the assessee- company. Similarly receipt of service charges of Rs. 8,32,458 has also no direct nexus with the industrial activities of the assessee-company because providing of services to pumps is a distinct activity in itself and it has got no direct nexus with the manufacturing activities. We are therefore of the view that in the impugned order, the Commissioner (Appeals) rightly held that service charges is not derived from industrial undertaking, therefore, not entitled to deduction under section 80-1 of the Income Tax Act, 1961. However, we find considerable force in alternative contention of the Id. Counsel for the assessee that only net income from service and interest be excluded. Therefore, if it is true, interest-bearing funds were utilized for earning interest income, then, interest paid to that extent would have to be allowed as set of against interest income. Similarly, amounts spent in earning service charges are also required to be set off against service charges received. In the present case, no such exercise was done by any of the authorities below. Therefore, the order of the Commissioner (Appeals) is set aside and the matter is restored back to the assessing officer for limited purposes of verifying the above facts and fresh adjudication in the light of guidance provided by us.
11. In the result, for statistical purposes, the appeal is partly allowed.