Income Tax Appellate Tribunal - Delhi
Mrs. Saroj Dassani vs Assistant Commissioner Of Income Tax on 2 December, 2005
Equivalent citations: (2006)99TTJ(DELHI)345
ORDER
R.V. Easwar, Vice President
1. This appeal by the assessee relates to the asst. yr. 2001-02. The assessee is an individual engaged in the business of export of garments and made-up articles.
2. The first ground is general and requires no decision.
3. The second and fourth grounds are connected. They are directed against the assessment of the interest income of Rs. 5,10,008 under the head "Income from other sources". The assessee received the aforesaid interest in respect of fixed deposit receipts placed as margin money with the bank for the purpose of availing various credit facilities such as packing credit, etc. The assessee contended before the IT authorities that the interest income must be assessed under the head 'business' and consequently, the deduction under Section 80HHC should also be correspondingly allowed. The contention was rejected by the IT authorities who took the view that the interest has to be assessed under the head 'Income from other sources'. They further held that the interest income was not derived from the export activities and was, therefore, eligible for deduction under Section 80HHC. The contention of the assessee before us, is that the interest income is inextricably linked with the carrying on of the assessee's business and, therefore, it should be assessed under the head 'business' and correspondingly the deduction under Section 80HHC is also to be allowed. We see force in the assessee's contention. It is not in dispute that the assessee is engaged in the export of garments and other articles. It is also not in dispute that the assessee availed of the various credit facilities and guarantees given by the bank for the purpose of carrying on the business. For obtaining these facilities, the assessee was obliged to place the fixed deposit receipts with the bank as margin money. The interest was derived from the fixed deposit receipt. In normal circumstances, the interest will have to be assessed only as 'Income from other sources' since the immediate source thereof is the investment in the fixed deposits. Once the fixed deposit receipts were utilized by the assessee for the purpose of its business by placing them with the bank as margin money for the purpose of availing of various credit facilities, the fixed deposit ceased to be a mere investment and became a commercial asset which was utilized for the purpose of the assessee's business. Such utilization affords nexus between the interest and the fixed deposit, and therefore, the interest becomes liable to be assessed under the head 'business'. The source of the interest no doubt continues to be the fixed deposit, but since the fixed deposit, which was either to be treated as pure investment, became converted into an asset utilization for the purpose of the business, which became a commercial asset, and therefore, the interest became taxable as 'business income'. It would be too simplistic a view, to tell that even after the conversion of the fixed deposit (investment) into a commercial asset which was put to use for the purpose of facilitating the assessee's business, the source of the interest still continues to be the investment and not the commercial asset. The characteristic of the asset had changed and the change cannot be ignored while examining the nature of the interest income. We, therefore, hold that the interest income is liable to be assessed as 'business income'.
4. So far as the question of deduction under Section 80HHC, with regard to the interest income is concerned, it is regulated by the Expln. (baa) below the section. This Explanation itself recognizes the position that in any given case, amount received by way of interest would be treated as part of the profits and gains of the business. However, 90 per cent of the interest amount will be excluded from the profits of the business for the purpose of computing the deduction under the section. Accordingly, 90 per cent of the interest income of Rs. 5,10,008 will be excluded while computing the deduction under Section 80HHC in respect of the interest. We may add that no argument was advanced before us on behalf of the assessee to the effect that the interest amount of Rs. 5,10,008 represents the gross interest and that it is only the net interest which would fall to be excluded.
5. In the result, the grounds are allowed.
6. Ground No. 3, which relates to the disallowance of monies paid to the Customs Department, is dismissed as not pressed.
7. Ground No. 5, relates to the disallowance of 20 per cent of the vehicle expenses of Rs. 11,87,742. The assessee has five or six vehicles and the expenditure includes depreciation, repairs and maintenance, petrol, driver salary and interest on loan taken for acquiring the vehicles. It was stated before us that the assessee does not own personal vehicle, therefore, use of the aforesaid vehicles for personal purposes cannot be ruled out. We therefore, uphold the disallowance in principle but reduce the disallowance to 10 per cent of the total expenditure and allow the ground in part.
8. Ground No. 6 relates to the deduction under Section 80HHC. While completing the assessment, the AO noted that the assessee had credited Rs. 60,89,183 as DEPB (Duty Entitlement Pass Book Scheme) and that the assessee had claimed deduction under Section 80HHC in respect of 90 per cent of the aforesaid credit. A similar claim had also been made in respect of the DFRC receipt which means 'Duty Free Replenishment Certificate'. Both the AO as well as the CIT(A) took the view that the DEPB and DFRC schemes were to be treated as business receipts as per Section 28(iv) of the Act and they were covered by Sections 28(iiia), (iiib) and (iiic) of the Act. They have accordingly applied Expln. (baa) and excluded both the receipts from the profits of the business. They have also held that the amounts so excluded cannot be added back to the profits of the business under the proviso to sub-Section (3) of Section 80HHC since that proviso also permits the addition of only such receipts which are specifically mentioned in cls. (iiia), (iiib) and (iiic) of Section 28. In this view of the matter, both the receipts were held not entitled to the deduction under Section 80HHC of the Act.
9. The assessee's contention before us is that the issue is now fully covered in his favour by the order of the Delhi Bench of the Tribunal in the case of P&G Enterprises (P) Ltd. v. Dy. CIT (2005) 93 TTJ (Del) 788 : (2005) 93ITD 138 (Del).It was pointed out that the import export policy and procedure for the period 1997-2002 deals with DFRC and DEPB. According to para 7.4 of the policy, DFRC is issued to a merchant-exporter or manufacturer-exporter for the import of in-puts used in the manufacture of goods without payment of basic customs duty and special additional duty. The conditions under which DFRC would be issued are mentioned in the sub-paras (i) to (vi). Para 7.14 deals with DEPB. It says that for customs not desirous of going through the licensing route, an optional facility is given under DEPB and the objective of DEPB scheme is to neutralize the incidence of customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit against the export product. The issue whether DEPB credit is eligible for deduction under Section 80HHC has been considered by the Delhi Bench of the Tribunal in the above order. In that case, there was no dispute that the DEPB receipt was in the nature of business receipt chargeable to tax under Section 28(iv) of the Act and consequently, would form part of the profits of the business. The Tribunal proceeded to examine the question whether the 90 per cent of DEPB receipt can be excluded from the profits of the business in view of the Expln. (baa) to Section 80HHC. It was held that it cannot be excluded because what was mentioned in the Explanation was only any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 and the DEPB receipt, which falls under Section 28(iv) of the Act, does not find mention in the Explanation. The Tribunal observed that the deliberate omission to exclude Section 28(iv) in the first category of sums mentioned in the Explanation clearly suggests that the legislature never intended to exclude 90 per cent of any receipt falling under Section 28(iv) of the Act. The Tribunal then proceeded to examine whether the DEPB receipt can fall within the clause 'any other receipt of a similar nature' mentioned in the aforesaid Explanation. The Tribunal held that the DEPB receipt is not similar to the receipt by way of brokerage, commission, interest, rent, charges, etc., mentioned specifically in the Explanation since these words show that only those receipts which can be considered as compensation for the services rendered or for use of property can be excluded and its scope cannot be extended to receipts such as DEPB which accrued to the assessee on account of exports. On this reasoning, the Tribunal held that 90 per cent of DEPB receipts, which are assessed under Section 28(iv) of the Act, cannot be excluded from the profits of the business for the purpose of computing deduction under Section 80HHC. In the present case, the Departmental authorities have brought the DEPB receipt as well as the DFRC receipt of Rs. 7,79,946 to tax under Section 28(iv) of the Act and not under Clauses (iiia) to (iiic) of Section 28. The facts of the controversy being identical with those in the cited order of the Tribunal, respectfully following the same, we direct the AO to allow the deduction under Section 80HHG in respect of DEPB and DFRG.
10. We must however, notice an argument advanced by the learned Departmental Representative based on the judgment of the Supreme Court in the case of Hindustan Lever Ltd. v. CIT . In that case, the assessee made profits on sale of export entitlements and claimed deduction under Section 80HHC in respect of such profits. The Supreme Court held that the profits cannot be said to have been derived from the export of goods out of India as required by the section. It was held that the immediate source of the profits was the sale of the import entitlements and not the export activities. Firstly, the Supreme Court was not concerned with the DEPB and DFRC receipts. We have already referred the Import Export Policy and Procedure 1997-2002. Both the incentives are provided to the assessee only because of the exports. To repeat, DFRC is issued to an exporter for the import of inputs used in the manufacture of goods without payment of basic customs duty and special additional duty. However, such inputs would be subject to the payment of additional customs duty equal to the excise duty at the time of import. There are other conditions attached to the issue of the certificate. Firstly, the DFRC shall be issued only in respect of export products covered under the provisions as notified by DGFT. Secondly, the certificate shall be issued for import of inputs having the same quality, technical characteristics and specification as those used in the end-product and as indicated in the shipping bills. Thirdly, the certificate shall be subject to minimum value addition of 33 per cent. Fourthly, the certificate may be issued in respect of exports for which payments are received in non-convertible currency. The DEPB is issued as an optional facility for exporters who do not wish to go through the licensing route. The objects of the DEPB scheme 'is to neutralize incidence of customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit, against the export product'. The credit is given as a percentage of the FOB value of exports made in freely convertible currency. The credit is available against export products and at such rates as may be specified by way of public notice, for import of raw material, intermediates, components, etc. The DEPB is freely transferable subject to the condition that it shall be for import at the port specified by the DEPB, which shall be the port from where exports have been made.
11. The above conditions of issue of DFRC and DEPB show that the immediate source of these two receipts is the actual exports of goods out of the country. No person other than an exporter would be eligible for these two receipts. The immediate source of DEPB and DFRC is, therefore, the exports made by the assessee and in that view of the matter, the ratio laid down by the Supreme Court in the aforesaid decision is also fully satisfied in the sense that the immediate source of the DEPB and DFRC is the exports made by the assessee.
12. For the above reasons, we hold that the assessee is entitled to deduction under Section 80HHC in respect of DEPB and DFRC. The ground is allowed.
13. Ground No. 7 is directed against the levy of interest under Sections 234B and 234C of the Act. The contention is that the interest has been mechanically charged. We find that no reasons have been given in the assessment order for charging the interest. Respectfully following the order of the Special Bench of the Tribunal in the case of Motorola Inc. v. Dy. CIT (2005) 96 TTJ (Del)(SB) 1, we restore the matter to the file of the AO, who shall afford an adequate opportunity to the assessee before charging the interest and giving reasons therefor.
14. In the result, the appeal is partly allowed.