TMI Blog2009 (2) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) has erred in directing the Assessing Officer to include the foreign exchange rate difference gain of Rs. 73,97,334 pertaining to the export of earlier years in the export turnover for the purpose of arriving at the allowable deduction under section 80HHC of the Income-tax Act, 1961 without appreciating the fact that the assessee is following the mercantile system of accounting. 3. On the facts and circumstances of the case and in law the learned CIT(A) has erred in directing the Assessing Officer to delete the addition of Rs. 20,89,502 made in the closing stock of finished goods without appreciating the facts of the case. 4. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer restored." 3. As regards the first ground in respect of treatment of interest income, the facts of the case are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee received interest on fixed deposits amounting to Rs. 10,95,220 which was netted against interest expenditure paid to its Banker and only net amount of interest amounting to Rs. 1,79,72,230 was debited to profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,00,000+2,00,000 9,63,920 Rs. 1,80,00,000 = Rs. 2,08,849 ( c ) Interest from Saraswat Bank Rs. Nil Total = [( a ) 1,25,271 = ( b ) 2,08,849)] Rs. 3,34,120 Simultaneously, this income of Rs. 3,34,120 is allowed to be netted off against business interest expenditure in view of the findings given by Mumbai ITAT in case of Diamond Creed [2002] 82 ITD 291 (Mum.) and ITAT, Delhi (Special Bench) decision in case of M/s. Lalsons Enterprises 89 ITD 25 (Delhi). Balance amount of interest on the fixed deposits is directed to be treated as income from other sources which will not be eligible for deduction under section 80HHC." 5. Hence, the revenue is in appeal against the income of Rs. 3,44,120 which is allowed to be set off as business income and the assessee through C.O. challenged the finding of the CIT(A) regarding balance amount of Rs. 7,61,100 treating the same as income from other sources . 6. We have heard the learned representatives of the parties and perused the record. The case of the revenue is that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty. Likewise, a company may have income from other sources.... The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Income-tax Act". This court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, this court exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 ITR 881 (SC). The Supreme Court held as under : (page 884) "His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head "Income from other sources" only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC), the question before the court was whether, the assessee was entitled to the benefit of section 25(3) of the Indian Income-tax Act, 1922, in respect of interest on securities. It was concluded that the section did not apply to non-business income. However, the securities, in this case, were held to constitute the stock-in-trade of the business and, therefore the income from securities was treated as equivalent to business income." 6.6 In CIT v. Chugandas Co. [1965] 55 ITR 17 (SC), Shah J., speaking for the court, observed (Page 24) : "The heads described in section 6 and further elaborated for the purpose of computation of income in sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income : the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this court in the United Commercial Bank Ltd. s case ( supra ), that business income is broken up under different heads only for the purpose of computation of the total income: by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, and, therefore, the interest income from the bank deposit should be treated as "income from business" especially when this bank deposit was claimed and accepted as capital employed in the new industrial undertaking for relief under section 80J of the Act." 6.8 From above discussions we noticed that each case has got to be decided on the facts arising in that case because interest income can be a capital receipt; it can be "income from business" and "income from other sources". The different treatment of interest income is also to be given while considering deduction under chapter VI-A of the Act. Business profit in section 80HHC is different than normal business profit. Explanation (baa) to section 80HHC provides that profits of the business means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by... Thus for the purpose of calculation of deduction under section 80HHC, first it is to see whether interest is assessable under the head "profits and gains of business or profession" or it is assessable under the head income from other sources . Interest assessable under the head "income from other sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er as the receipts for the payment of which he was otherwise entitled under the business. It cannot be separated from the business receipts and treated as "income from other sources". 6.10 In the light of above discussion if we consider the judgment relied upon revenue in the case of Kashmir Arts ( supra ) wherein it has been held that interest earned by the assessee on FDR kept with bank as margin money as condition for availing credit facility is not business income. But contrary to that view we find following judgments including judgments of jurisdiction a High Court and Delhi High Court itself. It is settled law that, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. 6.11 The Bombay High Court in the case of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 held that where inter-corporate deposits were made for short period by the assessee from surplus funds that were set apart for payment for imported machinery, the interest earned was business income and not income assessable under the head income from other sources . 6.12 In CIT v. Favre Leuba Co. Ltd. [1979] 120 ITR 897 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of section 80HHC. The relevant facts of that case and the finding of the Hon ble Bombay High Court are as under : "The assessee has claimed that they were includible in the business profits. The assessee had claimed that, however, the said charges were not includible in the total turnover. The Tribunal had held in favour of the assessee. Hence, this appeal is filed by the Department. In the case of CIT v. K.K. Doshi Co. [2000] 245 ITR 849 (Bom.), decided vide Income-tax Appeal No. 77 of 2000 this court took the view that the business profits in the above formula will not include receipts by way of brokerage, commission, interest, etc., as they have no linkage with the export activities. In the said judgment, this court has also discussed the subsequent amendment with effect from 1-4-1992, by which it has been clarified that business profits will not include receipts by way of brokerage, commission, interest, labour charges or any other receipts of similar nature. The Legislature has further provided for ten per cent deduction from such income to account for expenses incurred in earning the above incomes. Therefore, in view of our judgment in Income-tax Appeal No. 77 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven before 1-4-1992. In fact, the Legislature have clarified that receipts like interest, commission, etc., have no nexus with the export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded. Moreover, the clarification has been introduced by way of clause ( baa ) in the Explanation. Hence, the said amendment was clarificatory in nature. It cannot be disputed that there were several conflicting orders passed by the Department as the position was not clear. Hence, the amendment has come into force from 1-4-1992. However, the said amendment is clarificatory in nature. Even without the amendment, with the inclusion of the above receipts in the business profits, the formula became unworkable because the assessee s introduced receipts in the business profits which had no nexus with the export activity. In some cases, the result was that sale proceeds from export activity were nominal whereas the income from local sales was proportionately very large and on that basis the assessee s who had composite business claimed the benefits of deduction under the said section. After 1-4-1992, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest paid and interest received for the purpose of business of the assessee, therefore, the interest was treated as income from other sources. The learned AR submitted that the assessee is in possession of necessary evidences to support that there was nexus between interest paid and interest received on FD as the interest received on FD was kept as margin money for the purpose of business. After hearing the learned DR and perusing the material on record, we remit this part of the matter to the file of the Assessing Officer to decide the issue in light of above discussions whether the balance interest part is assessable under the income from as income from other business or as "income from other sources". The Assessing Officer is directed to calculate deduction under section 80HHC in the light of above judgment Kantilal Chhotalal case ( supra ) of jurisdiction High Court after providing reasonable opportunity of hearing to the assessee. 6.18 Thus, the ground of appeal of the revenue and the ground of appeal of C.O. is allowed for statistical purposes as discussed above. 7. 2nd Ground of appeal of revenue is in respect of foreign exchange rate difference gain per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under : . . . Under sub-section (2) of section 80HHC, sale proceeds of goods or merchandise exported out of India and received in convertible foreign exchange become entitled to the deduction subject to fulfilment of other requisite conditions. Clause ( a ) of sub-section (2) of section 80HHC provides that such sale proceeds have to be received in convertible foreign exchange within a period of six months from the end of previous year or, within such further period as the competent authority may allow in this behalf. Thus, a plain reading of the provision makes it clear that once the competent authority has extended the time, in a case where it is necessary, or, where the sale proceeds have been received within a period of six months from the end of the previous year, such sale proceeds are directly refutable to the ports made and no further inquiry is necessary. Once Legislature has provided for treating a receipt within a period of six months after the end of the previous year, or within further extended period, as sale proceeds relatable to exports, it would not be open to revenue to raise such a controversy. The legislature in its wisdom has taken into consideration the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost of finished goods worked out at Rs. 4,915 per carat. Since, the appellant is following the method of valuing its closing stock either at net realizable value or actual cost value whichever is lower, appellant has rightly worked out its value of the closing stock of the finished goods at Rs. 4,915 per carat only. I also find merit in the arguments of the learned AR of the appellant that no such addition can be made until and unless some deficiency in its stock register or books of account are pointed out by the Assessing Officer and the provisions of section 145(3) are invoked. I also find merit in the arguments of the learned AR of the appellant that there cannot be any benefit to the appellant by suppressing its closing stock as the deduction under section 80HHC is available at 80 per cent on the export profits in the year under consideration whereas deduction in subsequent year is at 70 per cent. In totality of all these facts and circumstances, I do not find any reason to sustain the addition of Rs. 20,89,502 made by the Assessing Officer in the closing stock of the finished goods. Same is directed to be deleted." 11. The learned AR reiterated his submissions w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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