TMI Blog2012 (9) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that:- As decided in CIT Versus Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME COURT] excise duty and sales tax were includible in the "total turnover", which was the denominator in the formula contained in section 80HHC(3) as it stood in the material time whereas amendments to section 80HHC(3) indicate exclusion of book profits but reasoning in this judgment is confined to the workability of the formula in section 80HHC(3) as it stood at the material time - in favour of assessee. Computation of deduction u/s 80HHC - 90% exclusion of net interest/rent or gross interest/rent - Held that:- As the facts in the year under appeal are identical to that of earlier year wherein the co-ordinate Bench has taken a view with respect to interest income and held that 90% of not the gross interest/rent but only the net interest/rent have to be reduced from business profits while computing deduction u/s. 80HHC. Further in the case of ACG Associates Capsules (P) Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA) the Hon’ble Apex Court has held that net interest needs to be reduced under Cl.(1) of Explanation(baa) to Sec. 80HHC for determining profits of business. Thus 90% of the net interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand the assessee has demonstrated with the help of details and its accounts that the investments have been made out of the sale of investments and out of free reserves. It has not utilized unsecured loans for the purpose of making investments - as Revenue has not been in a position to rebut the facts by bringing any material on record no disallowance can be warranted - in favour of assessee. - I.T.A. No. 3184/AHD/2010. & I.T.A. No. 3195/AHD/2010 - - - Dated:- 31-7-2012 - SHRI MUKUL KR.SHRAWAT SHRI ANIL CHATURVEDI, JJ. Appellant by : Mr. Milin Mehta Respondent by : Mr. Raj Mehra, Sr. D.R. ORDER PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. These are two cross appeals one filed by the assessee and the other by the Revenue against the common order of Ld. CIT (A)-I, Baroda dated 16-8-2010 for the assessment year 2004-05. 2. Since both the appeals are heard together, we dispose off these appeals by a consolidated order for the sake of convenience. I.T.A.No.3195/AHD/2010 (Revenue s appeal) 3. In this appeal Revenue raised following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds were available for making investments. The A.O. noticed that disbursements of new loans were received between 22-8-2003 to February, 2004 and investments were made between 30-6-03 to 25-3-04. He thus concluded that interest bearing funds have been utilized by the assessee for making investments during the year. He further held that the assessee has failed to establish that the investments made in the earlier years are out of interest free funds. He therefore estimated the interest and other expenses at 10% of dividends received and accordingly made the disallowance of Rs.12,96,839/- u/s. 14A of the Act. 6. Aggrieved by the order of A.O., assessee carried the matter before the CIT (A). CIT (A) deleted the addition of 10% disallowance of dividend income of Rs.12,96,839/- for the reason that the A.O. could not establish direct relationship between the investments and interest bearing funds. 7. Aggrieved by the action of CIT (A), the Revenue is now in appeal before us. 8. Before us, the Ld. D.R. relied on the order of the A.O. 9. On the other hand, Ld. A.R. submitted that the A.O. has made addition on adhoc basis being 10% of total dividend income. He further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover. The assessee relied on the decision of Bombay High Court in the case of Sudarshan Chemicals Ltd. 112 Taxman 511 and Special Bench decision of Calcutta High Court in the case of IFB Agro Industries Ltd. vs. DCIT 83 ITD 96. The A.O. did not accept the contention of the assessee and accordingly for working out the deduction u/s. 80HHC, worked out the gross turnover after including the element of Excise Duty and Sales Tax 13. Aggrieved by the decision of A.O. the assessee carried the matter in appeal before the CIT (A). 14. CIT (A) held that the exclusion of Sales tax and Excise Duty from the total turnover was covered in favour of the assessee by virtue of the decision of Apex Court in the case of Lakshmi Machine Works 290 ITR 667. Aggrieved by the order of CIT (A), the Revenue is now in appeal before us. 15. At the outset the Ld. A.R. submitted that the facts in the present assessment year are identical to that of earlier years and that the issue is covered in favour of the assessee by the decision of Hon ble Supreme Court in the case of CIT vs. Lakshmi Machine Works (2007) 290 ITR 667 (SC). He further pointed out that in the assessee s own case in ITA No.1450/Ahd/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit of the business for the purpose of computing deduction u/s. 80HHC of the Income Tax Act, 1961 on the ground that they do not constitute business income. Particulars. Amount (Rs.) Intrerest on margin money 10,890 Interest on ICD 60,164 Calibration Income 96,249 Insurance claim 13,97,786 Brokerage on Investments 28,285 Lease rent 33,751 21. The A.O. observed that for the purpose of computing deduction u/s. 80HHC, while calculating profit of business as per Explanation (baa) to sub-section (4B) to section 80HHC assessee has not reduced 90% of income from interest and Misc. Income. The details of the interest and Misc. Income are as under:- Interest from bank on margin money. 10980 Interest on Inter corporate deposits. 60164 71144 Misc. Income:- Calibration Income. 96249 Insurance claim 1397768 Lease rent. 33751 S. Balances W/ back. (855) Sundry Income. 474379 2001292 22. The A.O. held the income to be not from business for the purpose of computing deduction u/s. 80HHC. He accordingly reduced the aforesaid income w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned that it is required to submit evidence in support of the conditions outlined in 4th proviso to sec. 80HHC(3). The A.O. is accordingly directed to recomputed the deduction under sec. 80HHC inline with aforesaid directions. Ground No.1 is partly allowed. 23. Aggrieved by the order of Ld. CIT (A) , the assessee is now in appeal before us. At the outset, the Ld. A.R. fairly submitted that with respect to receipt of interest from bank on margin money, interest on ICD and calibration Income, the issue has been decided against assessee by Hon ble ITAT order in ITA No.1450/Ahd/2006 dated 30-6-2010.He placed on record at page 117 to 132 copy of the order. He however, urged that In view of the decision of Apex Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (2012) 343 ITR 89 only net income be reduced and not the gross income. 24. With respect to lease rent (Rs.33,750), the Ld. A.R. submitted that the assessee had already reduced the said amount while computing deduction u/s. 80HHC. He pointed out to the computation of income at page 8 of the paper book. He therefore, urged that the A.O. may be directed to verify and allow consequential relief. 25. With respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and perused the material on record. With respect to the reduction of 90% of interest from bank on margin money we find that the issue has been decided by co-ordinate Bench in assessee s own case in earlier year ITA No.1450/Ahd/2006 by holding as under:- 14. As regards to interest income on outstanding trade debtors and interest from bank on margin money, the Ld. Counsel for the assessee stated that only netting has to be granted in view of the decision of Hon ble Delhi High Court in the case of CIT Shri Ram Honda Power Equip (2007) 289 ITR 475 (Delhi).On the other hand the Ld. Sr. D.R. stated that now the issue has become clear after the decision of Hon ble Bombay High Court in the case of CIT vs. Asian Star Co. Ltd. in ITA. No.200 of 2009(Bom), wherein Hon ble Bombay High Court observed that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc., have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distorti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s appeal is dismissed. 29. In the case of ACG Associated Capsules (P) Ltd. vs. CIT (2012) 343 ITR 89 (supra) the Hon ble Apex Court has held as under:- Held that ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head profits and gains of business or profession , was to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business. 30. We find that the facts in the year under appeal are identical to that of earlier year. In earlier years the co-ordinate Bench has taken a view with respect to interest income and held that 90% of receipts by way of interest have to be reduced from business profits while computing deduction u/s. 80HHC. Further in the case of ACG Associates Capsules (P) Ltd. (supra) the Hon ble Apex Court has held that net interest needs to be reduced under Cl.(1) of Explanation(baa) to Sec. 80HHC for determining profits of business. Since the facts in the year under appeal are identical to that of earlier years and respectfully following the decision of Apex Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier year ITA No. 89/Ahd/2007 by holding as under:- 2. The first common issue in these appeals is against the order of CIT (A) in directing the Assessing Officer to reduce only net off insurance claim in at 90% from business profits while computing deduction u/s/ 80HHC of the Act. 3. After hearing the rival contentions and going through the facts of the case, we find that the assessee has contended that there is no profit element involved in insurance receipts, as the insurance claim is purely for the recovery of loss of material and asset of the company due to damage to the material and assets. We are of the view that the expenditure incurred by the assessee on material and assets lost due to damage is more than the insurance claim and there was no income to the assessee in the nature of insurance claim. This view has also taken by Special Bench of this Tribunal of Ahmedabad in the case of Nirma Industries vs. ACIT (2005) 95 TJ 867 (Ahd).This receipt of insurance claim is not an income, the same will not be included either in the total turnover nor in the business profits of the assessee for the purpose of computation of deduction u/s. 80HHC of the Act. Accordingly, Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reduced and only net income has to be excluded to the extent of 90% under clause (baa) while computing deduction u/s. 80HHC of the Act. This common issue of Revenue s appeal and that of assessee s appeal is allowed for statistical purposes, in view of the above direction. 35. Since the facts in current year are similar to that of earlier year, we following the decision of co-ordinate Bench direct the A.O. to reduce the receipt of brokerage claim from total turnover as well as business income and compute deduction u/s.80HHC of the Act. 36. With respect to the lease rent we find that assessee has pointed out to the computation at page 8 of the paper book wherein the lease rent of Rs.33,750/- has been reduced while computing deduction u/s. 80HHC. In view of these facts, we direct the A.O. to verify the submissions of assessee and allow consequential relief. 37. Thus this ground is partly allowed. Ground No.2 - Adhoc disallowance of 5% of Sales promotion. 38. Assessee had debited Rs.79,14,053/- as Sales promotion expenses. It included exhibition, sample, meeting expenses, dealers conference expenses etc. The A.O. held that the nature of expenses reveal that many expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Hon ble ITAT has decided the matter against the assessee. (ITA No.1418/A/2006, 89./A/2007 CO No.80A/09 dt.30-6-2010). On the other hand, the Ld. D.R. supported the order of A.O. 44. We have heard the rival submissions and perused the material on record. We find that the co-ordinate Bench on identical matter, in assessee s own case, in earlier year has decided the matter by holding as under:- 24. After hearing the rival contentions and going through the facts of the case, we find that the assessee has not vouched the expenses and the Assessing Officer on scrutiny found that these expenses include the office expenses incurred at its branches at Madras, Bombay, Delhi and Kolkata. According to the Assessing Officer, on scrutiny of these expenses he finds that there are many expenses which have been incurred in providing tea, coffee, refreshments cold drinks, etc. to various visitors but nature of all these expenses reveals that these are many expenses which are not subject to verification and not properly vouched also. None business nature of many expenses can also not be ruled out. The CIT (A) also confirmed the action of the Assessing Officer. We find that, even now before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The factual position is that during the year the assessee had made certain investments in mutual funds and also received unsecured loans. The assessee placed on record at page 110 of the paper book list of investments made along with the date of investments. He also placed on record at page 111 of the paper book the details of loan received during the year. The details reveal that loan from Banks constituted major portion of loan. From the statement of loan and investment, the Ld. A.R. demonstrated that the investments were made prior to the receipt of unsecured loan from banks. The A.R. also placed on record at page 106 of the paper book the amount realized on sale of investments. From the statement it is observed that assessee received Rs.7.34 crore on the disposal of investments. Further, as per the balance sheet of the assessee it was having reserves of Rs.48.97 crore at the beginning of Financial Year. Bombay High Court in the case of Reliance Utilities Power Ltd.,(313 ITR- 340) has held as under:- The principle, therefore, would be that if there are funds available both interest free and over draft and/or loans taken then a presumption would arise that investments woul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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