TMI Blog1999 (10) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 145 per bag only. The assessee himself had also received processing charges of Rs. 145 per bag in his own factories in Tamilnadu for undertaking the processing for other parties. On the basis of these details the AO inferred that for 15,464 bags of raw nuts the reasonable amount of processing charges payable by the assessee was Rs. 22,42,145 only and that the excess payment of Rs. 2,53,750 was hit by s. 40A(2). In the assessment Rs. 2,53,750 was thus added as disallowance of processing charges under s. 40A(2). In the first appeal, the CIT(A) felt that the AO was not correct in making a comparison with the charges paid for processing the raw nuts in the factories at Kanyakumari and that only the charges paid for processing the nuts in the factories in Kerala should have been considered for the purpose of comparison. On analysing the charges paid for the processing done in different factories, the CIT(A) found that the assessee paid Rs. 2,53,750 as the charges for processing 875 bags of nuts in the factory at Chenkulam in Kerala. The payment was at the rate of Rs. 290 per bag. The CIT(A) further noticed that the processing charges payable for the works done in Kerala factorie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to be made only with the rates prevailing in the factories in Kerala only. 4. On behalf of the Revenue, Shri C.D. Nair, the Departmental Representative supported the order of the CIT(A) and stated that the appellate authority had made a detailed analysis of the charges paid by the assessee for processing nuts in various factories and found that the excess payment was made only to the sister concern M/s Vijayalakshmi Cashew Co., which belongs to the assessee's father. It was the contention of the learned Departmental Representative that as found by the CIT(A) the assessee was paying processing charges at a higher rate because of the close relation with the payee and so the provisions of s. 40A(2) were rightly applied in the circumstances of this case. It was the contention of the learned Departmental Representative that there was no valid ground for interfering with the order of CIT(A) to give further relief to the assessee. 5. We have considered the rival submissions and gone through the facts of the case. The CIT(A) has sustained the addition to the extent of Rs. 52,500 on the view that for the nuts processed in the factory at Chenkulam belonging to Vijayalakshmi Cashew C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of Rs. 1,62,476 included the bata payable to the workers and the staff in the factories, we find that no details had been furnished before the Revenue authorities regarding the Bata thus included in the total claim. Before us, also no details were furnished to show the inclusion of the bata in the claim of travelling expenses. It was the contention of Shri Hariharan that on the turnover of more than Rs. 14 crores in the business, the travelling expenses as claimed by the assessee came to less than 1 per cent only and, therefore, the same could not be viewed as excessive. But then the disallowance has not been made on the ground that the claim of travelling expenses was excessive or unreasonably high. The CIT(A) has particularly referred to the fact that no evidence had been furnished by the assessee to show that the travelling expenses had been incurred entirely for the business purpose. It was for the assessee to show with reference to the expenses in the earlier years that the claim for the current year was entirely for the business purpose only. In the circumstances of this case we find no reason to interfere with the order of the CIT(A). We thus, confirm the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export, the assessee was not only buying raw nuts from the local market, but also making imports from other countries and for that purpose he had to keep margin deposits as required by bank for opening letters of credit. He stated that as stipulated by the Revenue Bank of India, the assessee's bank was insisting on keeping sufficient margin money for opening letters of credit for imports. It was further stated that the bank was transferring from the export proceeds the required amounts to term deposit accounts to maintain the margin money and thereafter informing the assessee regarding such adjustments. Shri Hariharan stated that the assessee had no choice. In the manner as he would not have been in a position to import raw nuts, in which case his business would have suffered badly. Though the assessee was getting interest on such deposits, that was at rates lower than what the assessee was paying as interest on the borrowings like packing credits. It was his claim that the deposits were made by the assessee in the course of his business and for the purpose of business only and that the CIT(A) was not correct in holding that the bank deposits had no nexus with the assessee's busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm deposits with banks was not profit of that business. The learned Departmental Representative further stated that the assessee was having surplus income generated in the business and that had gone into the fixed deposit account earning substantial amount as interest. Such interest was rightly assessable as income under the head 'other sources', in view of the decision of the jurisdictional High Court. As regards the further contention that under Expln. (baa) only the net interest was to be excluded and not the entire interest receipt of Rs. 12,79,638 our attention was drawn to Expln. (baa) to point out that the expression used therein was "any receipt by way of borrowings, commission, interest" and not net amount by way of brokerage, commission interest etc. If the intention of the legislature was to exclude only the net receipt under Expln. (baa), there was no reason why it was not made clear as net receipt, rather than receipt by way of interest etc. The learned Departmental Representative added that when the provisions were clear, it would not be correct to give the meaning of net receipt by applying the Explanation. 12. Having regard to the facts of the case and considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnish before the AO evidence to show that there was a direct nexus and the deposit had been made in the course of the business and also for the purpose of import of raw materials. After verification the AO will ascertain whether the bank deposits were maintained for the purpose of the assessee's business and then include the interest as part of the business profit. Interest on the deposit accounts made not for the purpose of the business since would be assessable separately as income under the head 'other sources'. 13. As regards the bank interest includible in the export profit, we hold that only the net interest amount is to be excluded under Expln. (baa) below s. 80HHC(4A). In this view of the matter, we are following the decision of the Tribunal, Calcutta Bench-C in the case of Kheemji Hansaraj. The Mumbai Bench-A of the Tribunal has also taken the same view in the case of Kantilal Chotalal. We accordingly direct the AO to recompute the deduction under s. 80HHC after excluding only the net amount of interest if any, on adjustment against the interest payment. 14. The next ground in this appeal is to the effect that the CIT(A) was not correct in holding that processing cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed as a deduction under s. 80HHC. We thus find it necessary to give the direction to the AO to exclude not only the processing charges collected from other parties, but also the expenditure incurred in respect of such charges so as to effect as actual exclusion from the profit only the income derived from the processing charges. The AO will recompute the relief under s. 80HHC on that basis. 16. The next ground in this appeal is regarding the claim for deductions under ss. 80HH and 80-I of the IT Act. In computing the income for the asst. yrs. 1992-93 the assessee claimed deduction under s. 80HH of Rs. 23,83,985 as the profits from newly established industrial undertaking in a backward area. Under s. 80-I also deduction was claimed for an equal amount as the relief on the profits and gains from the industrial undertaking after a certain date. The assessee is having cashew factories at Mylakad in Kerala and at Poonthope in Kanyakumari District in Tamilnadu. The assessee had also got raw-nuts processed in the factories belonging to sister concerns. The AO noticed that during the previous year the assessee had processed in all 46,130 bags of raw nuts, out of which 16,305 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertakings. Therefore, the AO was justified in limiting the deduction to the profit derived from the appellant's own industrial undertaking at poonthope." 18. On behalf of the assessee, Shri Hariharan, the learned representative, submitted before us that the CIT(A) was not correct in restricting the deduction under ss. 80HH and 80-I to the profit from the processing carried out in the assessee's own factories. According to him, the decision of the first appellate authority was based on an erroneous view that each factory is a separate industrial undertaking. Shri Hariharan submitted that the entire business of the assessee was a composite industrial undertaking entitled to the deductions under s. 80HH and 80-I. It was contended that for the purpose of the deduction the profit of each factory was not required to be considered separately. Shri Hariharan further stated that for becoming eligible for the deduction, it was not a condition that the entire manufacturing should be done in the assessee's own factory. Even if some activity was carried out in the factories belonging to other parties, that would not disentitle the assessee to the deduction otherwise allowable under ss. 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actory. Shri Nair added that there was no evidence furnished by the assessee to show that either in the head office at Quilon or in any of his factories there was first some activity carried out on the raw nuts before they were transferred to the factories in Kanyakumari District belonging to the sister concerns, where the processing was done at a fixed rate payable as processing charges. In this connection it was stated that the assessee was paying processing charges at Rs. 145 per bag to the sister concern for getting the nuts processed. The learned Departmental Representative stated that on a comparison it could be seen that the charges paid by the assessee were at the same rate at which he was incurring expenses on processing the nuts in his own factory in Kanyakumari District. Shri Nair also drew our attention to the resistance on the part of the assessee against the disallowance of the processing charges paid to the sister concern by applying the provisions of s. 40A(2). It was then submitted that the decision in the case of Indian Resins and Polymers relied on by the learned representative of the assessee was distinguishable on facts. In that case there was clear evidence to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's unit and packed and exported. The assessee was also extracting oil from the cashew shell and exporting the same. The Tribunal found that part of the manufacturing activity was carried on by the assessee, since drying the raw cashew in sun light and the ultimate packing were done by the assessee and that even though the assessee got the work of roasting and dehusking done by a third party, such work was being done under the direct supervision of the assessee. As far as the claim for deduction under s. 80HH was concerned, the Tribunal took the view that the assessee had satisfied the conditions of cl. (iv) of s. 80HH(2) and that apart from the permanent workers, the other workers who were employed either on a casual or temporary basis were also to be taken into consideration to examine whether the assessee had satisfied the conditions in cl. (iv). The Tribunal thus allowed the claim of the assessee for deduction under s. 80HH on a reference, the High Court affirmed the decision of the Tribunal that the conversion of raw cashew nuts into cashew kernels would be manufacturing or processing activity and that the assessee was an industrial undertaking entitled to the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the quantity of 19,435 bags which were processed in the factory belonging to sister concerns. If any part of the processing work, like drying or packing after the processing was carried out by the assessee, then the assessee would be entitled to the deduction under ss. 80HH and 80-I on the profit derived from their sale. The AO will give the assessee an opportunity to furnish the evidence to show that some part of the processing work was done by the assessee only. In that case, in view of the decision of the jurisdictional High Court reported in (1998) 148 CTR (Ker) 143 : (1999) 235 ITR 5 (Ker) the assessee cannot be denied the relief under ss. 80HH and 80-I on the profit derived from the sale of kernels processed in the factory in the backward area belonging to the sister concerns. The decision of the Supreme Court in the case of Chillies Export House Ltd. vs. CIT (1997) 140 CTR (SC) 1 : (1997) 225 ITR 814 (SC) also supports the allowance of the relief in such circumstances. After ascertaining the facts correctly, the AO will allow the deduction bearing in mind the principles laid down in the above decisions. 23. There is also another ground raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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