TMI Blog2007 (12) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed and ground No. ( b ) of the Department s appeal is dismissed. Whether the taxable portion of the profits of the 100 per cent EOU should be taken into consideration while computing the profits of the business in terms of Explanation ( baa ) to section 80HHC - In our considered opinion, the Assessing Officer should have also taken into consideration the 10 per cent taxable income of the 100 per cent EOU as forming part of the profits of the business for the purposes of section 80HHC. The Department would have had a point if the assessee had sought to include even the exempt portion of the EOU income (90 per cent) in the profits of the business but that is not the case here. Further it is also the settled position that the Assessing Officer should take into consideration the assessed business income and not the returned income while computing the profits of the business in terms of clause ( baa ) of Explanation to section 80HHC of the Act. That not being done, the order of the Assessing Officer on this issue suffers from infirmity. Thus, we direct the Assessing Officer to add taxable income of EOU to arrive at the profit of the business for the purpose of computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire business income of the 100 per cent EOU will be the profits of the business of the undertaking . It has been held above that the interest earned on temporarily surplus business funds of the 100 per cent EOU deposited with banks for short periods is business income and has in fact been so assessed. It is not in dispute that the surplus funds were of the 100 per cent EOU. As such, the interest earned thereon has to be regarded as part of the profits of the business of the undertaking . We further find that the Tribunal in the case of Cheviot Co. Ltd. ( supra ) for assessment years 2003-04 and 2004-05, relied upon by the assessee, has dealt with similar issue. In those cases, the difference between the provisions of sections 10B and 80HH was noted and after considering the judgments of the Hon ble Supreme Court in Sterling Foods case[ 1999 (4) TMI 1 - SUPREME COURT] and in P.R. Prabhakar v. CIT[ 2006 (7) TMI 121 - SUPREME COURT] approving Tribunal in International Research Park Laboratories Ltd. v. Assistant CIT[ 1994 (7) TMI 304 - ITAT DELHI- D SPECIAL BENCH] , it was held that the profits of the business of the undertaking would include its entire business income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is not permissible to compute the export profit under section 80HHC of the Act. Accordingly, the Assessing Officer took the gross interest value and excluded the same to arrive at the export profit under section 80HHC of the Act. 2.1 Before the CIT(A), the assessee relied upon the decision of the Special Bench of ITAT, Delhi in the case of Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 in support of the contention that 90 per cent of the net interest should be deducted, it being not in dispute that the interest paid had nexus with the interest received. The CIT(A) observed that the assessee s case had considerable merit and supported by the said Special Bench decision. However, he directed the Assessing Officer to examine the claim of the assessee in the light of the said decision and allow the same. 2.2 During the course of hearing before us, it was contended by the assessee s learned counsel that once the CIT(A) had found that the assessee s claim is duly covered and supported by the Special Bench decision in the case of Lalsons Enterprises ( supra ) since approved by the Hon ble Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip [2007] 289 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct on the face of the accounts maintained by the assessee. The interest income has been treated by the assessee as business income in its accounts as well as in the computation of income. Interest income has been reflected in the P/L Account as part of other income separately from sales or turnover because the provisions of Part II of Schedule VI to the Companies Act, 1956 require separate disclosure of sales/turnover and other income, such as interest. Such presentation as per requirements of the Companies Act does not amount to treatment of interest income as income from other sources . Only dividend of Rs. 350 was shown by the assessee in the computation of income as income from other sources . In the assessment order also, only the said dividend income of Rs. 350 was assessed under the head Other sources and the interest income was assessed under the head Business . Therefore, the distinction drawn by him to the facts of the present case is out of context and has no relevance. 2.5 We have heard the parties, considered their rival arguments and perused the material placed before us. On perusal of the assessment order it is evident that the Assessing Officer did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer. The Department is in appeal on the ground that the CIT(A) erred in directing the Assessing Officer to take into consideration the taxable portion of the profits of the 100 per cent EOU for computing the profits of the business for the purposes of section 80HHC. 3.1 The assessee carries on the business of inter alia, manufacturing Guar Gum Refined Split, Guar Gum Powder and Guar Meal etc. The assessee has three units. The unit at Jodhpur is a 100 per cent Export Oriented Undertaking in which the assessee manufactures Guar Gum Refined Split. According to the assessee, it is entitled to exemption under section 10B in respect of the income of the 100 per cent EOU to the extent of 90 per cent. Exports are also made from the other units of the assessee and hence the assessee is also entitled to deduction under section 80HHC in respect of its export profits. While computing the deduction under section 80HHC, the Assessing Officer did not treat the 10 per cent taxable income of Rs. 2,58,81,120 of the 100 per cent EOU as part of the profits and gains of business or profession . 3.2 On appeal, the CIT(A) found considerable force in the submissions of the assessee. He thus h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial force in the contention of the learned counsel for the assessee. As has been rightly stated by the assessee s counsel ( vide page 1 of assessee s paper book), the Assessing Officer in his calculation started with the figure of Rs. 9,63,75,791 which was the profit as per assessee s computation before including 10 per cent taxable income of Rs. 2,58,81,120 of 100 per cent EOU, whereas clause ( baa ) of Explanation to section 80HHC provides for starting figure of profits of the business as computed under the head Profits and gains of business or profession . In view of the above, in our considered opinion, the Assessing Officer should have also taken into consideration the 10 per cent taxable income of the 100 per cent EOU as forming part of the profits of the business for the purposes of section 80HHC. The Department would have had a point if the assessee had sought to include even the exempt portion of the EOU income (90 per cent) in the profits of the business but that is not the case here. Further it is also the settled position that the Assessing Officer should take into consideration the assessed business income and not the returned income while computing the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduced the profits of the business of the 100 per cent EOU by Rs. 21,47,671. The Assessing Officer divided the total turnover of the 100 per cent EOU by the total turnover of the assessee s entire business to arrive at the percentage of 21 per cent for apportioning the said expenditure. It is not the case, as contended in the department s ground of appeal that the Assessing Officer took the sum of Rs. 97,85,388 as the travelling and conveyance expenditure relating to the 100 per cent EOU. The Assessing Officer actually took 21 per cent of Rs. 97,85,388. 5.2 Before the CIT(A), the assessee did not dispute the Assessing Officer s action in taking a portion of the directors fees and the auditor s remuneration as relating to the 100 per cent EOU. However, the assessee objected to the action of the Assessing Officer in attributing 21 per cent of the travelling and conveyance expenses appearing in the consolidated accounts of the assessee of its entire business as relating to the 100 per cent EOU. The material portion of the written submissions filed by the assessee before the CIT(A) on this issue is reproduced hereinbelow : 7.2 It is submitted that the Assessing Officer s ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the consolidated accounts of the assessee which relate to the other units of the assessee can be allocated to the 100 per cent EOU. The CIT(A) accepted the submissions of the assessee and directed the Assessing Officer to compute the profits of the business of the 100 per cent EOU by taking the travelling and conveyance expenses at Rs. 1,25,565. 5.3 The Ld. Departmental Representative supported the order of the Assessing Officer on this issue and submitted that the assessee maintained consolidated accounts. While computing the profits of the business of the 100 per cent EOU, the Assessing Officer apportioned the common administrative expenses in the ratio of the total turnover of the 100 per cent EOU to the total turnover of the assessee s entire business for allocation to the EOU. He thus attributed 21 per cent of the travelling and conveyance expenses of Rs. 97,85,388 of the assessee s entire business to the 100 per cent EOU and the CIT(A) by accepting new evidence which was not produced during assessment proceeding has accepted the assessee s explanation in contravention of rule 46A and wrongly directed the Assessing Officer to take these expenses of the 100 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing conveyance expenses also. Therefore, we find no justification in the submission of the Ld. Departmental Representative and grounds raised in this regard that the CIT(A) decided the issue on the basis of new evidence which were not filed before the Assessing Officer. As explained by the Ld. Counsel, the customers of the 100 per cent EOU were fixed and no travel including foreign travel was required for selling its product and only local travelling and conveyance expenses were incurred. It was also explained as to why the travelling and conveyance expenses of the other units, which included foreign travel expenses for selling the products of those units, were higher. The Department has not disputed any of the facts asserted by the assessee. In that view of the matter, the CIT(A) was justified in accepting the assessee s contention that the travelling and conveyance expenses of the 100 per cent EOU were Rs. 1,25,565 only which had already been debited while computing the profits of the business of the 100 per cent EOU and that the said expenditure was not required to be increased since the assessee did not incur any other amount for travelling and conveyance relating to the 100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping temporarily surplus business funds of the 100 per cent EOU with banks was business income and that on a fair interpretation of section 10B, which was differently worded from section 80HH considered by the Hon ble Supreme Court in Sterling Foods case ( supra ), such interest income formed part of the profits of the business of the 100 per cent EOU eligible for deduction under section 10B. The CIT(A) held that even if the interest income constituted business income, in view of the principles laid down by the Hon ble Supreme Court in the case of Sterling Foods ( supra ), the nexus between the interest income and the industrial undertaking was not direct but incidental and such interest income could not be included in the profits of the business of the 100 per cent EOU. 6.2 The learned counsel for the assessee submitted that it is not in dispute that the interest of Rs. 28,74,473 was earned by the assessee by keeping temporarily surplus business funds of the 100 per cent EOU with banks for short periods. In view of the judgment of the Hon ble Calcutta High Court in CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252 , such interest income has to be assessed under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nks for short periods was justified and the CIT(A) has rightly upheld the same. 6.4 We have considered the rival contentions of the parties and perused the material placed before us. As already noted above, the interest income earned by the assessee has not been treated by it as income from other sources . The assessee did not show any interest income under the head Other sources in its computation of income. In the assessment order, interest income has been assessed under Business head and not as Other source income. The Assessing Officer s observation in the assessment order that the interest income on the surplus business funds of the 100 per cent EOU was nothing but an income in the nature of other source is only to highlight his view point that there was no direct nexus between the interest income and the industrial undertaking. This is quiet apparent from the fact that in his final computation, the Assessing Officer assessed the interest income under the head Business and not Other sources . In any event, as held by the jurisdictional High Court in Tirupati Woollen Mills Ltd. s case ( supra ), such interest income has to be assessed under the head Business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits and gains derived by a 100 per cent EOU from export provided for in sub-section (1) of section 10B is subject to the provisions of the said section, sub-section (4) lays down its own formula for computing the profits derived by the undertaking from export. The formula is as follows : Profits of the business of the undertaking Export turnover Total turnover of the business carried on by the undertaking Therefore, profits and gains derived by the undertaking from export for the purposes of section 10B are required to be computed in accordance with sub-section (4) of section 10B. Sub-section (4) speaks of profits of the business of the undertaking . To such figure of profits, the ratio of the export turnover to the total turnover of the business carried on by the undertaking is to be applied to determine the profits eligible for deduction. There is no requirement for the purposes of section 10B to establish direct nexus between the income and the undertaking. The entire business income of the 100 per cent EOU will be the profits of the business of the undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rs. 31,64,850 was also required to be excluded on the same basis. The further submissions of the assessee before the CIT(A) were as follows : 8.2 It is submitted that out of Rs. 47,972, a sum of Rs. 23,888 is on account of rates and taxes. The said amount having in fact not been paid by the assessee, it self-disallowed the same under section 43B as would be evident from the details annexed hereto and marked A . Thus, there has been double disallowance of the sum of Rs. 23,888 once under section 43B and a second time as prior period expenses. 8.3 It is submitted that in fact liability for the sum of Rs. 47,972 crystallised during the year. For instance, in respect of the interest of Rs. 6,769.69 p., the assessee received the debit advice dated 1-4-2002 of the Bank (copy annexed hereto and marked B ) during the previous year relevant to the assessment year 2003-04. It is submitted that the Assessing Officer was not justified in disallowing the said sum of Rs. 47,972. The CIT(A) restored the issue back to the Assessing Officer with the observation that if the contention of the assessee that the liability for Rs. 47,972 had crystallized during the relevant previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was admittedly not paid during the relevant year. However, as has been pointed out before the CIT(A) and contended before us, the assessee itself has disallowed the said expenditure under section 43B. Out of the remaining expenditure of Rs. 24,084 [Rs. 47,972 - Rs. 23,888]: sum of Rs. 6,769 was on account of interest for which, according to the assessee, debit advice was issued by the bank on 1-4-2002 and hence the said amount got left out from consideration in the accounts for the year ended 31-3-2002, but reflected in the accounts as on 31-3-2003. Considering the totality of the facts and circumstance of the case, we find substantial force in the contention of the assessee s learned counsel that the Assessing Officer was not justified in taking into consideration only the income excluding the related expenditure of the earlier years and disallowing the expenditure as prior period expenditure. Income and expenditure is correlated. If income is to be considered, then automatically expenditure in relation to such income needs to be taken care of. The assessee deserves to succeed on this ground. 8. In the result, the appeal of the assessee is allowed and that of the depart ..... X X X X Extracts X X X X X X X X Extracts X X X X
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