TMI Blog2000 (3) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the Assessing Officer to exclude 90% of the interest income of Rs. 1,02,44,000 for the purpose of computing deduction under section 80-HHC of the Act. 4. That on facts and circumstances of the case and in law the CIT erred in directing the Assessing Officer to exclude the interest of Rs. 1,02,44,000 while computing deduction under sections 80HH and 80-I of the Act. 5. That on facts and circumstances of the case and in law the order passed by CIT under section 263 of the Act is bad in law and void ab initio." 2. The assessment in this case was completed under section 143(3) on 12-3-1998 on a total income of Rs. 5,39,86,776 after allowing deduction under section 80HHC at Rs. 2,66,30,268; under section 80HH at Rs. 2,85,38,344 and under section 80-I at Rs. 3,56,72,930. Having examined the records of this particular case and the assessment order, it was noticed by the Commissioner of Income-tax (Admn.) that order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. The proceedings under section 263 were initiated and a show-cause notice was issued to the assessee that why the assessment made be not modified on the following grounds: "(i) Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y are statutory payments covered under section 43-B of the Act. The reliance was also placed on the decision of Delhi Bench of the Tribunal in the case of Modipon Ltd. v. IAC [1995] 52 TTJ 477 and in the case of Indian Communication Network (P.) Ltd. v. IAC [1994] 49 ITD 56 (Delhi) (SB). The Commissioner of Income-tax (Admn.) did not find favour with the assessee. He was of the view that the amount was shown as loans and advances to the Excise Department and as per provisions of section 43-B, the credit has to be given only on the payment. Therefore, this deduction should not be allowed. Accordingly the Assessing Officer was directed to disallow the claim of the assessee on this account by modifying the assessment accordingly. 3A. In regard to computation of deduction under section 80HHC it was stated that the interest received was inextricably linked with the carrying on of the business. The interest received in the present case having only abated the interest cost, 90% of the interest received cannot be deducted for the computation of income. The CIT(A) was not satisfied with the reply. He considered the explanatory Memoranda to Finance (No. 2) Bill, 1991 and held that the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me here does not flow from and is not derived from the industrial undertaking. On the other hand, this part of income is in the nature to be taxed as "income from other sources". 4.3.2 Having regard to the propositions and discussions in the foregoing paragraphs, I hold the view that the amount of interest has to be excluded while computing the deductions under sections 80-HH, 80-I and 80-IA of the Income-tax Act, 1961." 5.1 Accordingly the Assessing Officer was directed to disallow the claim of the assessee by modifying the assessment. Now the assessee is in appeal here before us. 6. The learned counsel fairly admitted that the proceedings under section 263 were initiated correctly, but the Commissioner of Income-tax (Admn.) has exceeded his jurisdiction because he has himself decided the issues and the Assessing Officer was directed to modify the assessment order accordingly. On this point the learned DR strongly submitted that the Commissioner of Income-tax (Admn.) was well within his jurisdiction to initiate the proceedings under section 263 and in no manner the jurisdiction was exceeded. After considering the submissions on this point, we are of the view that CIT(Admn.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriving income from an industrial undertaking, The interest shown in the Profit loss account is net interest, as the receipts on account of interest were set off against the interest payment. Both the receipts and payments are for the purposes of business, therefore, netting has to be allowed. On this proposition the reliance was placed on the following decisions of various Benches of the Tribunal, High Courts and Supreme Court:--Pink Star v. Dy. CIT [2000] 72 ITD 137 (Mum.), Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70 (Delhi), CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) and Suhag Traders (P.) Ltd. v. ITO [1996] 89 Taxman 287 (Delhi) (Mag.). 7. On the other hand, the learned DR strongly objected the arguments put forward by the learned counsel of the assessee. He further placed strong reliance on the order of the Commissioner of Income-tax (Admn.) and reliance was also placed on the following decisions:--CIT v. Amritlal Bhogilal Co. [1958] 34 ITR 130 (SC), Malabar Industrial Co. Ltd. v. CIT [1992] 198 ITR 611 (Ker.), Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 1292 (Mad.), Berlia Co. v. Asstt. CIT [1998] 67 ITD 347 (Coch.),South IndiaShipping Corpn. Ltd. v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is outstanding in the shape of loans and advances and the same was not deposited, therefore, the credit cannot be allowed. We have also noted that assessee has not added the excise value in its purchases and the same is shown separately in Modvat account. The expenses incurred on account of excise payment made at the time of material purchased is allowable under section 37. Therefore, also, we are of the view that the disallowances were not proper from this angle also. 10. In case of Modipon Ltd., the Delhi Bench has decided the similar issue in favour of assessee. The facts in that case also were similar to the case here before us. The excise duty paid was shown as advance by way of deposit in personal ledger account and the deduction as per provisions of section 43B was not allowed. The amount involved was related to excisable item lying in Godown of Excise Department and towards payment of excise duty thereon (bonded warehouse). The assessee paid some amount in advance by way of deposit in its personal ledger account, which is debited as and when the goods are cleared. The issue there was as to whether the assessee is entitled to claim such payment under section 43B. The Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Next ground is in regard to disallowance under section 80HHC. The Commissioner of Income-tax (Admn.) considered the explanatory Memoranda to Finance (No. 2) Bill, 1991, which spells out the reason for the exclusion of the amount for the purpose of section 80HHC. The explanatory Memoranda reads as under: 'Receipts like interest, commission etc. which do not have an element of turnover are included in the profit loss account. It is, therefore, proposed to clarify that profits of the business for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent charges or any other receipts of a similar nature. As some expenditure might be incurred in earning the incomes which is the generality of cases is part of common expenses, it is proposed to provide ad-hoc 10% deduction from such incomes to account for such expenses." 12.1 In view of this Memoranda of Finance (No. 2) Bill, 1991 the CIT was of the view that interest earned by the assessee should not be considered for the purpose of deduction under section 80HHC. Accordingly, the interest would not form part of total turnover. While holding so the CIT has further observed that even if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is to be taxed under the head "Income from other sources". The cases which were relied upon by the counsel of the assessee were not considered because of the Supreme Court has held that the interest earned from bank deposits will be treated as income from other sources. 15. We have perused the case law in the case of South India Shipping Corpn. Ltd. and Tuticorin Alkali Chemicals Fertilizers Ltd. and found that the ratio of these decisions are not applicable on the facts of the present case. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. the facts were that assessee earned interest on short-term bank deposits before the start of the business. Here in the present case the business has already started and only surplus funds were deposited in short-term FDRS. We further noted that other case laws relied upon from the side of assessee, which were in favour of assessee could not be considered because of the decision of the Hon'ble Supreme Court. The case laws relied upon by the counsel of the petitioner are briefly adverted here as under. 16. In the case of CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535 a Division Bench of the Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from business. 18. Now we would like to go through the findings of theApex Courtin the case of Tuticorin Alkali Chemicals Fertilizers Ltd. The facts of this case are as under: The assessee was a company incorporated onDecember 3, 1971for the purpose of, inter alia, manufacturing heavy chemicals, such as Amonia Choloride and Soda-ash. The trial production of the factory of the company commenced on30-6-1982. For the purpose of setting up the factory the company had taken term loan from various banks and financial institutions. That of the borrowed funds, which were not immediately required by the company, was kept invested in short-term deposits with banks. Such investments were specifically permitted by the Memorandum and Articles of Association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It has also given interest bearing loans to its employees to purchase vehicles upto the assessment year 1980-81. Interest earned by the company from various loans given by company and also from the bank deposits, was shown as income and was taxed accordingly. For the accounting year ending30-6-1981i.e., assessment year 1982-83 the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 19. We noted here that in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., the interest income was held as income from other sources because it was earned before commencement of the business and it was invested for the purpose of earning interest. There was no in extricably link with the process of setting up of its plant machinery which can reduce the cost of its assets. As the Apex Courtfound that the amount was invested for the purpose of earning interest, therefore, it was a revenue receipt. Accordingly it was held that this income was income from other sources. 20. However, the facts in the present case are different. Here the link of the investment was inextricably in nature because the assessee was paying interest on its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, as the facts are different in the present case with that of the facts in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. 21. In case of Bokaro Steel Ltd. theApex Courthas observed that if the assessee received any amounts which are inextricably linked with the process of setting up of its plant machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. 22. From the observations of the Hon'ble Supreme Court it can be easily inferred that there should be inextricably link with the interest income earned and the business activities. We have seen the facts of the present case. The assessee received interest income on short-term deposits and paid interest on the long-term borrowings, which reduces the burden of assessee on account of payment of interest which was paid for the purpose of the business and in this proposition there is no dispute that the amount paid on interest account was for the purpose of business. Therefore, there was an inextricably link. Accordingly we are of the view that the assessee is entitled to deduction under section 80HHC of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have not only distorted the actual cost of construction, but more importantly, an income which had no characteristic of a capital receipt would have escaped the tax net. Therefore, the Supreme Court did not allow a revenue receipt to be adjusted against capital expenditure. 17. In another case i.e., in CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC), at the relevant time, the assessee was in the process of constructing its factory and installation of plant. During this period assessee had given some of its capital assets to the contractors for use and had charged the contractors for the same. It had also given interest bearing advances to the contractors so that the contractors did not have to raise funds from outside agencies. The Tribunal and the High Court held that all these amounts received by the assessee had gone to reduce the cost of construction. These were in the nature of capital receipts which could be set off against capital expenditure incurred by the assessee during the relevant assessment years. The Supreme Court, distinguishing its decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. affirmed the view taken by the High Court by observing as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the business of the assessee and hence the adjustment. Since expenditure on interest is higher than the interest income, no interest income augmented the profits of the business which needed to be reduced as envisaged by clause (baa). This very principle has been followed by us while dealing with the issue relating to labour charges in earlier paras and also in respect of interest income." 24. By going through the observations and finding of the Tribunal in the case of Pink Star, we find that the issue is discussed in great detail. In this case, as we have already stated that both the decisions of the Apex Court are also discussed i.e., in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. and Bokaro Steels Ltd. and then the finding was given in favour of assessee, by holding that the interest income was inextricably linked with the business of the assessee and hence the adjustments were correctly made by the assessee. 25. Here in the present case before us, the facts are similar. Here also the assessee paid interest on borrowings and the surplus funds were invested and the assessee received interest. Therefore, we are of the view that netting has to be allowed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods [1999] 237 ITR 579 theApex Courthas held that sale of import entitlement cannot be treated as income from export business. Therefore, the income out of sale of import entitlement was not considered for the purpose of section 80HH. The facts here before us, as we have already stated, are different. Here, the question is of netting of the two interests, i.e., payment of interest and receipt of interest, which were for the purpose of business only. Therefore, this decision is also distinguishable on facts. 31. In view of all these discussions and in view of the circumstances of the present case, we are of the view that the assessee is entitled for netting of the two interests and we hold so. 32. In regard to deduction under sections 80HH and 80-I, we are of the view that these deductions have also to be allowed to the assessee because the unit of the assessee is an industrial undertaking, which is not in dispute, and we have already held that the interest income is income derived from industrial undertaking. For this reason we have given our detailed reasoning while disposing of the ground in regard to deduction under section 80HHC and for the same reasoning we hold that dedu ..... 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