Income Tax Appellate Tribunal - Mumbai
Dy. Cit vs Custom Capsules (P) Ltd. on 27 April, 2007
ORDER
D.K. Srivastava, Accountant Member
1. The issues in the appeal filed by the department and those in the memorandum of cross-objections filed by the assessee are inter-linked. We therefore find it convenient to dispose off both of them by a consolidated order.
2. In ITA No. 8948/Mum./2004, the department has taken the following ground of appeal:
The learned Commissioner (Appeals) erred in facts and circumstances of the case and in law:
(A) in directing the assessing officer to withdraw the depreciation allowed by him following the decision of Supreme Court in the case of M/s. Mahendra Mills Ltd 243 ITR 56 ignoring the fact that the said decision was given while the provision of Clause (vi) to Section 32(2) were in statute books and after the omission of the said clause from 1-4-1988 position of law has substantially changed;
(B) in directing the assessing officer to exclude excise duty and sales tax from the total turnover for the working out the deduction under Section 80HHC of the Income Tax Act, 1961.
3. In support of appeal, the ld. departmental Representative submitted that the issue with regard to ground No. 1 (A) stood decided in favour of the department by the decision or the Hon'ble jurisdictional High Court in Scoop Industries (P.) Ltd v. ITO (2007) 161 Taxman 366 (Bom.) and by the decision of a Special Bench of this Tribunal in Vahid Paper Converters v. ITO (2006) 98 LTD 165 (Ahd.) while the other issue raised in ground No. 1(B) stood decided in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 7691 (Bom.).
4. In reply, the learned Authorized Representative for the assessee supported the order of the Commissioner (Appeals). As regards ground No. 1(A), he submitted that the depreciation was not a mandatory deduction prior to insertion of Explanation 5 to Section 32 of the Income Tax Act with effect from April 1, 2002 and, therefore, the courts have held that the deprecia tion could not be thrust on the assessee - CIT v. Mahendra Mills (2000) 243 ITR 562 (SC); CIT v. Sree Senhavalli Textiles (P.) Ltd. ; CIT v. Kerala Electric Lamp Works Ltd (2003) 261 ITR 7213 (Ker); CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. and several decisions of this Tribunal. He submitted that Explanation 5 to Section 32 of the Act was prospective and, hence, was not F applicable to the assessment year under appeal in view of the decisions in Sree Senhavalli Textiles (P.) Ltd's case (supra), Kerala Electric Lamp Works Ltd.s case (supra). As regards ground No. 1(B), he submitted that the issue was covered against the department by the decision Sudarshan Chemicals Industries Ltd.s case (supra).
5. We have heard the parties. As rightly submitted by the learned departmental Representative, the decision of a Special Bench of this Tribunal in Vahid Paper Converters' case (supra) is clearly in favour of the department. Contrary decisions taken by Division Benches of this Tribunal cannot prevail over the decision of a Special Bench of this Tribunal. Similarly, the decisions of other High Courts referred to by the learned Authorized Representative for the assessee cannot prevail over the decision of Hon'ble Bombay High Court in Scoop Industries (P.) Ltd's case (supra) in its territorial jurisdiction. The decision of Hon'ble Supreme Court in Mahendra Mills 'case (supra) is not in the context of Section 80HHC of the Income Tax Act. Besides, the Hon'ble jurisdictional High Court has considered the decision of Mahendra Mills' case (supra) while rendering its judgment in Scoop Industries (P.) Ltd. 's case (supra). Thus, the issue raised in Ground No. 1(A) is squarely covered against the assessee and in favour of the department by the decision of a Special Bench of this Tribunal in Vahid Paper Converters' case (supra) as also by the decision of the Hon'ble Jurisdictional High Court in Scoop Industries (P.) Ltd. 's case (supra). In this view of the matter. Ground No. 1(A) taken by the department is allowed.
6. Issue raised in Ground No. 1(B) is covered against the department and in favour of the assessee by the judgment of the Hon'ble jurisdictional High court in Sudarshan Chemicals Industries Ltd.'s case (supra) in which the Hon'ble jurisdictional High Court has held that sales tax and excise duty would neither form part of the turnover nor of the profits for the purpose of computing deduction under Section 80HHC. In view of this matter, Ground No. 1(B) is dismissed.
7. Appeal filed by the department is partly allowed.
8. In CO. No. 210/Mum./2005, the assessee has taken the following grounds:
(1) The learned Commissioner (Appeals) erred in confirming the action of the assessing officer:
(2) Deduction under Section 80HHC is computed and the figure of Profits & Gains of business is arrived at by reducing 90 per cent of the gross amount on account of rent and interest received instead of net amount.
(3) The respondent prays that the assessing officer be directed to grant deduction under Section 80HHC by reducing from the profits and gains of business 90 per cent of the net amount of rent and interest.
9. We have heard the parties. In our view, both the issues, namely, netting off of interest income and rental income need to be decided afresh by the assessing officer in the light of the decision of Hon'ble jurisdictional High Court in CIT v. Bangalore Clothing Co. .
10. According to Explanation (baajto Section 80HHC, "profits of the business" A means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced inter alia, by 90 per cent of any sum referred to in Clauses (iiia), (info) and (Hid) of Section 28 or any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. Bare perusal of the aforesaid Explanation shows that the profits of the business would mean only those items, which are subject-matter of computation under Section 28 of the Income Tax Act under the head 'Profits and gains of business or profession'. Any receipt, which is not in the nature of income from business or assessable as profits and gains of business or profession under Section 28 of the Income Tax Act, will clearly fall outside the scope of Clause (baa) to Explanation to Section 80HHC of the Income Tax Act. The profit so computed under Section 28 is required to be reduced, inter alia, by 90 per cent of any sum referred to in Section 28(iiia) and (iiib) or any receipt by way of brokerage, commission, interest, rent, charges or any other receipt q of a similar nature included in such profits. According to the Explanatory Memorandum to the Finance (No. 2) Bill, 1991 explaining the reasons for insertion of Clause (baa) of the Explanation, receipts like interest, commission etc. which do not have an element of turnover are also included in the Profit & Loss Account and therefore the Government thought it appropriate to clarify through the aforesaid Explanation that the profits of the business for the purposes of Section 80HHC would not include receipts by way of brokerage, commission, interest, rent charges or any other receipt D of similar nature. In other words, the Explanation maintains a clear distinction between operational business income and non-operational business income. What is included in the turnover is treated as operational business income and what is not included in the turnover like brokerage, commission, interest, rent, etc. is treated as non-operational business income. It is 90 per cent of the receipts constituting non-operational business income, which is required to be deducted in terms of Explanation (baa) from the profits of the business. The aforesaid view is also supported by the decision of the Hon'ble jurisdictional High Court in Bangalore Clothing Co. 's case (supra) in which the Hon'ble High Court has held that the phrase "Profits of the business" for the purpose of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. The Hon'ble High Court has further observed that as 'some expenditure might be incurred in earning such income, an ad hoc 10 per cent deduction from such income is provided for, to account F for those expenses'. The Hon'ble High Court has thus drawn a clear distinction between operational business income as meaning that business income, which has an element of turnover and non-operational business income, which does not have an element of turnover.
11. In Lalsons Enterprises v. Dy. CIT (2004) 89 ITD 25 (Delhi), a Special Bench of this Tribunal has held that "it is only the 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest". Since the aforesaid decision of the Special Bench has been followed in a large number of cases decided by various Benches of this Tribunal at Mumbai, we see no reason to take a view different from the one taken by the Special Bench in Lalsons Enterprises' case (supra). This is more so when we are also persuaded by the reasoning given by the Special Bench for coming to the aforesaid conclusion. In this view of the matter, we restore the issue with regard to netting off of interest income to the file of the assessing officer with the direction to re-examine the issue and decide it afresh in the light of the decision in Lalsons Enterprises' case (supra) that it is only 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest. The burden shall be on the assessee to establish the requisite nexus to the satisfaction of the assessing officer in terms of the aforesaid principle laid down in Lalsons Enterprises' case (supra) and it is only then that the assessing officer shall reduce 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, from the profits of the business. If the assessee fails to establish the requisite nexus in terms of the aforesaid directions, the assessing officer shall be free to reduce 90 per cent of the interest from the profits of the business.
12. As regards netting off of other non-operational income, e.g., rental income, the decision of Hon'ble Bombay High Court in Bangalore Clothing Co. 's case (supra) is quite relevant in which it has been held that ad hoc 10 per cent deduction from non-operational income has been provided to account for the expenses in earning those incomes. Since the Legislature itself has provided 10 per cent of gross non-operational income to cover up expenses relating thereto, further netting cannot be allowed in terms of the aforesaid decision of Bangalore Clothing Co. As already mentioned above, deduction of expenses (3)10 per cent has already been statutorily provided for netting non-operational income. Statutory fixation of 10 per cent for expenses can neither be increased nor decreased by us. Netting off of non-operational income is permissible @10 per cent alone. No further netting can therefore be allowed.
13. In view of the foregoing, the assessing officer is directed to decide upon the issues raised in the Memorandum of Cross-objections afresh in the light of the decision in Bangalore Clothing Co. s case (supra) and the observations made above after giving a reasonable opportunity of hearing to the assessee. Memorandum of cross-objections is treated as allowed for statistical purposes.