Income Tax Appellate Tribunal - Pune
Deepak Pandurang Gadre, Ratnagiri vs Assessee on 15 November, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL
MEMBER AND
SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No. 225/PN/07
(Asstt Year: 2003-04)
Deepak Pandurang Gadre,
Prop. Gare Marine Export, .. Appellant
Ratnagiri
PAN ABHPG2085K
Vs.
Dy. Commissioner of Income-tax,
Ratnagiri Cir. Ratnagiri .. Respondent
Appellant by : Shri Nikhil Pathak
Respondent by : Shri Santosh Kumar
ORDER
PER G.S. PANNU, A.M:
This appeal by assessee is directed against the order of the Commissioner of Income-tax (Appeals), Kolhapur dated 15.11.2006 which, in turn, has arisen from an order dated 27.12..2005 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short 'the Act') pertaining to the assessment year 2003-04.
2. In this appeal, the solitary grievance of the assessee is against action of the lower authorities in excluding income earned by way of interest on short term deposits with the Bank for the purposes of computing deduction under section 10B of the Act.
2 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri
3. In brief, the facts are that the assessee is a proprietor of a 100% Export Oriented Undertaking (EOU). The assessee is engaged in the business of manufacture and sale of SURIMI, a product made from fish and is undertaking exports. For the year under consideration, i.e. assessment year 2003-04, assessee filed a return of income at Rs 2,07,90,920/-. In the return of income, assessee had claimed deduction under section 10B of the Act at Rs 17,38,53,807/-. In the assessment proceedings, Assessing Officer noted that assessee had included a sum of Rs 73,45,624/- representing interest on short term deposits with Bank, for the purposes of computing deduction under section 10B of the Act. On being asked to show cause as to why the deduction should not be denied on such income as the same was not derived from the export of sea food, the assessee contended that the surplus funds of the undertaking were temporarily parked in short term deposits with the Bank and the same were kept ready for meeting the business requirements. It was pointed out that the only business of the assessee was export of products manufactured by the EOU and, therefore, the entire profits and gains of the business of the EOU constituted income of the undertaking from export of articles or things. The assessee also referred to the provisions of section 80HHC of the Act, which also prescribed the method of computation of profits derived from export in section 80HHC(3)(a), which was also the case in section 10B(4) of the Act.. It was explained that whereas by way of Explanation (baa) in section 80HHC, a prescribed percentage of interest was excludible from the 'profits of business', while it was not so prescribed in section 10B of the Act. Therefore, interest income which constituted business profits of the EOU could not be excluded from the purview of section 10B, having regard to the method of 3 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri computation of profits derived from business provided in section 10B(4) of the Act. The assessee also contended that similar income had arisen in the assessment year 1996-97 wherein claim of the assessee for deduction under section 10B was accepted by the Assessing Officer. In the alternative, assessee contended that only the net amount of interest income, after setting off interest paid to the banks, should be excluded from the purview of section 10B following the decision of the Delhi Bench of the Tribunal in the case of Honda Siel Power Products Ltd v. DCIT 77 ITD 123 (Del). The Assessing Officer did not accept the pleas of the assessee as, according to him, interest on short term deposits of the EOU cannot be treated as income derived from export of sea food and, therefore, the same was excludible for the purposes of computing deduction under section 10B of the Act. The alternative plea of the assessee for excluding only the net amount of interest was also not accepted. Accordingly, income by way of interest on short term deposits from bank amounting to Rs 73,45,624/- was excluded for the purposes of computing deduction under section 10B of the Act and the same was assessed as 'income from other sources'. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).
4. Before the Commissioner of Income-tax (Appeals), it was contended by the assessee that the surplus funds of the undertaking, which were lying idle temporarily were placed in short term deposits to maximize profits. It was further argued that the Assessing Officer failed to appreciate that even in case of deduction under section 80HHC where the term 'export profits' is narrower than in section 10B, interest and other income were considered as eligible for deduction to the extent provided in the section. It was also submitted by the assessee before the 4 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri Commissioner of Income-tax (Appeals) that in section 80HHC, specific exclusions have been mentioned from "total turnover" and "profits of the business" and, in the absence of such specific exclusion in section 10B, it should be construed that this section does not warrant any such exclusion. Alternatively, it was argued that interest paid by the undertaking on working capital loans be set off and only net interest income be brought to tax. The Commissioner of Income-tax (Appeals) upheld the stand of the Assessing Officer that the interest income is not eligible for deduction under section 10B of the Act. However, he allowed the alternative plea of the assessee, that interest paid of Rs 41,37,306/- is to be reduced from the total interest income of Rs 76,23,795/- and only the balance of Rs 34,86,489/- is liable to be excluded for the purpose of computing deduction under section 10B of the Act. Not being satisfied with the order of the Commissioner of Income-tax (Appeals), assessee is in further appeal before us.
5. Before us, the learned Counsel for the assessee submitted that the lower authorities have erred in holding that interest income from short- term deposits with Bank was not eligible for deduction under section 10B of the Act. It is contended that the idle funds of the business of the 100% EOU were placed in short term deposits with the Bank which yielded interest income. The said investment was made for a short period while at the same time, such funds were kept ready for the requirements of the business; and, the only business of the assessee being export of goods manufactured by the EOU and thus the said income is assessable as "business income" and not as "income from other sources", as held by the Assessing Officer. In this connection, reliance was placed on a decision of the Pune Bench of the Tribunal in the case of Kataria Shewani 5 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri Developers, Pune v Dy. CIT ITA No 1549/PN/07 dated 23.7.2010.The Tribunal in the case of Kataria Shewani Developers, Pune v Dy. CIT (supra) held a similarly-earned interest income to be assessable as business income, following the decision of the Hon'ble Bombay High Court in the case of CIT v Lok Holdings 308 ITR 356 (Bom). Reliance was also placed on the decisions of the Hon'ble Bombay High Court in the case of CIT v Paramount Premises (P) Ltd 190 ITR 259 (Bom), Sreekrishna Polyster Ltd v Dy. CIT 274 ITR 21 (Bom). Apart therefrom, reliance was also placed on the decision of the Mumbai Bench of the Tribunal in the case of J P Morgan Services India (P) Ltd. v. Dy. CIT 33 SOT 327 (Mum), wherein in the context of a claim under section 10A of the Act, interest on fixed deposits was held to be assessable as part of the profits of business. In this background, the learned Counsel pointed out that the Bangalore Bench of the Tribunal in the case of ACIT v Motorola India Electronics (P) Ltd 112 TTJ 562 (Bang) has held that interest income is eligible for deduction u/s 10B of the Act and the said decision clearly covers the controversy in question.
6. On the other hand, the leaned Departmental representative has defended the action of the lower authorities by pointing out that interest income per se cannot be treated as business income so as to qualify for deduction under section 10B of the Act. The leaned Departmental representative pointed out that in the case of CIT v Menon Impex (P) Ltd. 259 ITR 403 (Mad), interest on fixed deposits has not been found eligible for deduction under section 10A of the Act and, therefore, similar reasoning should prevail in the present case also.
7. We have considered the rival submissions carefully. In this case, undisputably the appellant is an individual who is running a 100% EOU, 6 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri engaged in export of Sea food; and, claimed deduction under section 10B of the Act in relation to the profits and gains of the EOU. In principle, assessee has been held eligible for claim of deduction under section 10B of the Act. However, with respect to the interest on short term deposits with Banks, assessee has been held ineligible for claim of the deduction under section 10B of the Act primarily for the reason that such income is assessable as "income from other sources"; and, such income is not derived from the business of export of Sea food.
8. Section 10B of the Act, as it stood for the assessment year under consideration, provided for deduction of such profit and gains as are derived by 100% EOU from the export of article or things. Sub-section 4 of section 10B prescribes that the profits derived from export of article or things shall be the amount which bears to the profit of the undertaking, the same proportion as the export turnover bears to the total turnover of the business carried on by the undertaking. It only needs to be noted that Sub-section (1) of Section 10B prescribes a deduction for "such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things...." and Sub-section (4) of Section 10B prescribes the methodology to compute the "profits derived from export of articles or things" for the purposes of Sub-section (1) of Section 10B. In this background, we may now examine the claim of the assessee for deduction under section 10B of the Act in relation to the impugned income.
9. Having perused the decision of our co-ordinate Bench in the case of Kataria Shewani Developers v Dy. CIT (supra) interest income in question is liable to be assessed as business income. The Tribunal followed the parity of reasoning laid down by the Hon'ble Bombay High 7 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri Court in the case of CIT v Lok Holdings (supra) and also the judgments of the Hon'ble Bombay High Court in the case of CIT v Sreekrishna Polyster Ltd v Dy. CIT (supra) and CIT v Paramount Premises (P) Ltd (supra) in coming to its conclusion. In terms of the aforesaid judgments, the premise drawn up by our co-ordinate Bench is that deposit of surplus money with Bank was to be regarded as an activity in the course of business and the interest accruing therefrom is to be regarded as arising in the course of business activity and, such income was assessable as "business income." Similarly, in the case of J P Morgan Services India (P) Ltd. (supra) interest on fixed deposits taken out by depositing business proceeds, was considered as part of the profits and gains of the business of the assessee, following the judgment of the Hon'ble jurisdictional High Court in the case of CIT v Lok Holdings (supra). The Tribunal also held that such interest income was eligible for claim of deduction under section 10A of the Act. Following the aforesaid precedents, the impugned interest income from short term deposit with bank is assessable as business income, having regard to the facts and circumstances of the present case.
10. In so far as the claim of deduction under section 10B on such income is concerned, in our view, the order of the Bangalore Bench of the Tribunal in the case of ACIT v Motorola India Electronics (P Ltd) (supra) covers the controversy. In the case before the Bangalore Bench, the assessee claimed deduction under section 10B on interest earned on deposits held in EEFC account and inter-corporate loans advanced by the assessee to its sister concerns. Such income was held assessable as business income and eligible for claim of deduction under sections 10A/10B of the Act. In coming to such conclusion, the bench has specifically noted the relevant provisions of section 10B, as it stood for 8 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri assessment year 2003-04. Following discussion by the Tribunal in the Head Note is worthy of notice:
"Coming to the assessment year 2001-02, the Act has undergone a change. Sec. 10B has undergone a change. Earlier, it was an exemption section and income from these undertakings which are covered by this section did not form part of total income. From this particular year, though the section appears in Chapter III, which classifies incomes which do not form part of total income, a deduction from business income from the undertaking is granted by including the special provision. Another important feature in sub-s.(4) of sec. 10B is that the methodology of arriving at the export profits of the business of the undertaking is given in a formula, as in the case of section 80HHC. The terminology used in sub-s. (4) of sec. 10B is "profits of the business" of the undertaking in contradistinction to the words "profits and gains derived by the assessee" from a 100 per cent export oriented undertaking. The term "from the business of" is much wider than the term "derived from industrial undertaking". Keeping this distinction in mind, the entire profits derived from the business of undertaking should be taken into consideration, while computing the eligible deduction under section 10B/10A, by applying the mandatory formula. If the legislature intended to exclude interest from the term "profits of business of undertakings" under sec. 10A/10B, a similar provision as in the case of Explanation (baa) to sec.80HHC would have been inserted. No such Explanation has been introduced in sec. 10A/10B. Thus, the AO is directed to recompute the deduction under sections 10A and 10B on the lines indicated above for the assessment year 2001-02. 180 CTR (Mad) 40 : (2003) 259 ITR 403 (Mad) and (2003) 179 CTR (Mad) 522 : (2003) 260 ITR 304 (Mad) distinguished."
11. Following the aforesaid parity of reasoning, which is fully applicable in the instant case, we hereby hold that the assessee is eligible for claim of deduction under section 10B in relation to interest income earned on short term deposits with the Bank. Accordingly, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow the claim of deduction under sec. 10B in relation to interest income earned on short term deposits with the Bank
12. Before parting, we may refer to the reliance placed by the learned Departmental representative on the decision of the Hon'ble Madras High Court in the case of Menon Impex (P) Ltd (supra). We have perused the said decision ands find that the same has been rendered in the context of section 10A as it existed in the assessment year 1985-86. The amendment to section 10B, noted by the Bangalore Bench in the case of ACIT v Motorola India Electronics (P Ltd) (supra) with effect from assessment year 2001-02, makes the judgment of the Hon'ble Madras 9 ITA No225/PN/07 Shri Deepak P Gadre, Ratnagiri High Court inapplicable to the controversy before us, which relates to assessment year 2003-04, i.e. after the amendment in section 10B. Here, the said judgment does not help the Revenue in relation to the provisions of section 10B as it stood for the assessment year before us.
13. Resultantly, appeal of the assessee is allowed as above.
Pronounced in the open court on this 31st day of January, 2011.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 31st January, 2011
Copy to:-
1) Shri Deepak P Gadre, Ratnagiri
2) The Dy. CIT Ratnagiri Cir. Ratnagiri
3) The CIT (A) Kolhapur
4) The CIT Kolhapur
5) The Departmental Representative, "A" Bench, I.T.A.T.,
Pune.
By Order
"true copy"
Asst. Registrar,
I.T.A.T., Pune
B