9911796707
TMI Blog2008 (8) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... s eligible for the deduction. In response the assessee submitted that during the relevant year, it had imported gold bullion against letter of credits (LCs) opened in various banks and for the purpose of opening the LCs, it was required to deposit margin monies with the banks equivalent to 100% of the LC amounts and that these margin monies were provided out of the export sale proceeds. It was thus argued that the interest income was earned in the course of the business of the assessee and was directly connected to the same and hence eligible for the exemption. 3. The relevant particulars relating to the earning of the interest income on which exemption was claimed are given in annexure -A to the assessment order. The assessing officer noted the same and did not dispute the assessee's claim that the export sale proceeds were utilised for making fixed deposits with the banks as margin monies in order to open the LCs. He, however, took the view that sub-section (1) of Section 10B requires that the profits and gains on which exemption is claimed shall be derived by the undertaking from the export of articles or things and that the assessee did not satisfy this condition, in as mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was alternatively claimed that only the net interest shall be denied the exemption and not the gross interest. Strong reliance was placed on the judgement of the Hon'ble Karnataka High Court in Producin P. Ltd., v. CIT (2007) (290 ITR 598). 5. The Commissioner of Income-tax (Appeals) did not accept the contentions of the assessee. According to him, the LCs only served the purpose of securing to the supplier the value of the goods imported and if in this process the deposits made by the importer as margin monies earned some interest it cannot be said to be income derived by the EOU from export of articles. He, therefore, held that the earning of the interest is not directly linked to the export business. He further noted that the fact that the assessee could retain the fixed deposits well beyond the realization of the related export proceeds was "suggestive of the intention to earn profits on such deposits which are assessable only as IFOS". We may clarify that IFOS stands for "Income from other sources". He also relied on the judgement of the Hon'ble Karnataka High Court in Kabadi Enterprises v. ITO (2007) 290 ITR 610 in which it was held that the earning of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he distinction between the expressions "profits and gains of the business of the undertaking" and "profits and gains derived by the undertaking". It has been held by the Tribunal, points out the learned counsel for the assessee, that the former expression is of wider import and connotation and has to be construed accordingly. It has been further submitted that the Tribunal in the same paragraph has duly taken note of the fact that sub-section (4) has prescribed a statutory formula similar to the statutory formula prescribed by Explanation (baa) below Section 80HHC and the statutory formula cannot be distorted by the views taken by the Income-tax authorities. The submission in effect of the learned counsel for the assessee, was that the "profits of the business of the undertaking", and not merely the "profits derived by the undertaking", must be divided in the proportion which the export turnover of the articles or things bears to the total turnover of the business carried on by the undertaking. 7. As regards the further question as to whether the interest on fixed deposits given as margin monies for procuring LCs from the banks for the purpose of import can be considered as the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities should be upheld. 9. We have carefully considered the facts and the rival contentions. In our view, the submissions of the learned counsel for the assessee have to prevail. There is no dispute with regard to the facts giving rise to the interest income. The question for consideration is whether the interest income can be considered as profits and gains derived by the export-oriented undertaking from the export of articles or things within the meaning of sub-section (1) of Section 10B. This sub-section has been made "subject to the provisions of the section". Therefore, we have to understand the meaning of the expression "profits and gains as are derived by a hundred per cent export oriented undertaking from the export of articles or things" appearing in sub-section (1) in the light of sub-section (4) of the Section. Sub-section (4) before its substitution by the Finance Act, 2001 stood as under: (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered for division is only the profits of the business of the undertaking. The section does not contain the definition of what are the "profits of the business of the undertaking". This is in contrast with Explanation (baa) of Section 80HHC which defines, profits of the business as the profits computed in the assessment order under the head "profits and gains of business or profession" as the starting point. In the absence of a statutory definition of what shall be considered as profits of the business of the undertaking for the purpose of Section 10B, we have to understand the same in the normal and popular sense, having regard to the commercial practice and realities. Here we may refer to one crucial aspect of the matter. It is that before a particular revenue receipt is assigned the head "Income from other sources" u/s 56(1), it must first be ensured that it is not chargeable to income-tax under any of the other heads specified in Section 14 of the Act. Section 14 classifies the income under several heads such as salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. Section 56(1) says that income of every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the earlier judgement of the Delhi High Court in CIT v. Ritesh Industries Ltd., (2005) 274 ITR 324 which arose under section 80I, that duty draw back cannot be regarded as income "derived from the industrial undertaking". In the case of Ritesh Industries Ltd., (supra), the Delhi High Court had held that though the duty draw back may constitute profits and gains of the business by virtue of section 28 of the Act, but it cannot be considered as profits and gains "derived from the industrial undertaking" because its immediate or proximate source was not the industrial undertaking but the scheme formulated for the duty draw back. When this decision was cited by the revenue before the Delhi High Court in CIT v. Eltek SGS P. Ltd., (supra), which arose u/s.80IB of the Act, the Delhi High Court took the view that Ritesh Industries (supra) was distinguishable because of the difference in language used in the section considered therein. It was observed that it was crucial to appreciate the difference in language in Sections 80HH, 80I and 80IB and that it is the choice of the words (in the section) that makes all the difference in the interpretation of the Section. It was observed as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was cited by the learned CIT(DR). Both are judgments of the Hon'ble Karnataka High Court. Both were concerned with section 80-HHC. In the judgment in Producing P. Ltd. (supra) the assessee had received some amounts from foreign customers by way of advance in respect of the exports to be made by it. It was therefore held that the interest was referable to the export business. However, in Kabadi Enterprises (supra) the Hon'ble High Court noticed the judgment in Producing P. Ltd (supra) and distinguished the same on facts. In Kabadi Enterprises (supra), the material facts showed that interest was received by the assessee out of temporary deposit made in the bank. It was therefore held that there was no nexus or link between the interest and the export business. In the case before us, we have seen how the interest received by the assessee from the fixed deposits made with the banks as margin monies for obtaining LC facility has a close or live link with the business of the undertaking. The judgment of the Hon'ble Karnataka High Court in Kabadi Enterprises (supra) itself is authority for the position that the question whether a particular item of receipt (of income) is conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the export sale proceeds and not out of any surplus monies available with the assessee. Therefore, not only is there an inextricable link between the margin monies and the business of the undertaking, but there is also a link between the interest arising from the margin monies and the assessee's business. Thus, the receipt of interest on margin monies arises out of business transactions and, therefore, has to be considered as profits of the business of the undertaking. If it is found, as we have been able to from the facts of the case, that the interest is incidental to the business carried on by the undertaking, then Section 56(1) comes into play and it is not permissible in law to treat the interest as "income from other sources", the reason being that the interest is assessable as profits of the business of the undertaking. Therefore, in our humble opinion, the departmental authorities were not right in taxing the interest under the residuary head. They ought to have assessed the same as profits of the business of the undertaking. 11. At this juncture, it is necessary to notice an observation made by the Commissioner of Income-tax (Appeals) in paragraph 3.5 of his o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lved (except the usual risks due to market conditions) and the asset is kept apart from the business and is not made subject to the risks of the business, whereas in the case of fixed deposits made as margin monies for obtaining LCs, they are always made subject to the business risks. These distinctions cannot be lost sight of and in fact, it would be necessary to take them into consideration while judging the question whether the interest on the deposits should be assessed as income incidental to the carrying on of the business of the undertaking or as income from other sources. Going by the facts of the present case, it appears to us that it would not be correct in law to treat the interest income under the residuary head. The mere fact that the fixed deposits were retained well beyond the realization of the related export proceeds cannot justify the assessment of the interest income under the residuary head, the reason being that the margin monies have to continue with the banks until the LCs are honoured. In any case, it cannot be disputed that when the fixed deposits were made with the banks as margin monies they were made as part of the business operations of the undertaking, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". As already noted, there is no guidance in the sub-section as to how the profits of the business of the undertaking shall be ascertained. We have briefly adverted to this aspect earlier. In the absence of any specific guidelines, we have to follow the normal or popular concept of what is meant by the expression "profits of the business of the undertaking". This is what we have done, on the basis of the facts of the case, and we have found a close link or connection between the earning of the interest income and the business of the undertaking. It is necessary that in ascertaining the profits of the business of the undertaking, we have to examine the facts and circumstances of each case and it is not possible to lay down a formula which will be of universal application. A similar situation where a statutory formula as to what would be the "profits of the business" arose in Section 80HHC and this aspect of the matter has been noticed by the Bangalore Bench of the Tribunal in the case of ACIT v. Motorola India Electronics (supra). Explanation (baa) below Section 80HHC was introduced to statutorily prescribe a formula as to what would represent "profits of the business" for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for allowing the commission payment as a deduction and he summarized his reasons as follows: 26. The assessee has failed to establish the genuineness of the Payment due to the following reasons:- a. The recipient of commission M/s. Virgo Polymers (India) Ltd., is in the business of polymers and is in no way connected to jewellery business. b. No customers have been introduced by M/s. Virgo Polymers (India) Ltd., to anybody else other than Rajesh exports. In this regard, there is no reply to the point (g) of the annexure to summons. c. All the names of customers furnished have their addresses in Bangalore whereas M/s. Virgo Polymers (India) Ltd., is situated at Chennai No details have been provided regarding the same and no business connection details have been produced with regard to the parties introduced by M/s. Virgo Polymers (India) Ltd, d. No details have been given as to the exact nature of services rendered by M/s. Virgo Polymers (India) Ltd., e. No bills/invoices/communication copies have been furnished with respect to the dealings between M/s. Virgo Polymers (India) Ltd., and the customers or M/s. Rajesh Exports and the customers. f. No details have been fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, sustained the disallowance and dismissed the ground. 16. The assessee is in further appeal before the Tribunal contesting the disallowance of the commission payment. The learned counsel for the assessee reiterated the submissions made before the departmental authorities and drew our attention to the letter dt.6.5.2003 written by the assessee to Virgo Polymers (pages 54 and 55 of the paper book), the debit note dt.20.11.2003 issued by Virgo Polymers (pages 52 and 53 of the paper book), the letter dt.16.11.2007 addressed to the Commissioner of Income-tax (Appeals) in which the services allegedly rendered by Virgo Polymers were listed (page 51 of the paper book), the list of major customers introduced to the assessee by Virgo Polymers during the year (pages 49 and 50 of the paper book) and to the details of the sale of gold bullion made by the assessee to these customers during the year aggregating to Rs. 608.83 Crores in respect of which commission of Rs. 2,43,53,320/- was payable to Virgo Polymers (pages 57 to 67 of the paper book). It was submitted before us that the entire sales were for cash and since as per the terms of the agreement the maximum commission payable wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further stated as follows. By virtue of the export of gold jewellery since 1994, the assessee was entitled to import gold. The imported gold was permitted to be sold in India under special import licences. The assessee was not making use of these licences. Virgo Polymers approached the assessee and offered their help in selling the imported gold in the Indian market. After negotiations, the assessee agreed to sell gold in India through Virgo Polymers for a commission of 0.4 % of the sales subject to a maximum commission of Rs. 2 Crores. Virgo Polymers put through the sales by using the assessee's name and its Bangalore office. They lent their manpower, expertise and business contacts in effecting the sales. The following activities were carried on by Virgo Polymers for the assessee: 1) Deputing their team of people headed by Mr. Nagabhusan to conduct the business under the licence of the Appellant and in the premises of the Appellant at Bangalore. 2) Placing orders with the importer and fixing the gold price with the importer, as per the anticipated sale price and sale quantity. 3) Taking charge of the stock and maintaining the stock upon tallying the same every day. 4) Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal has the power to admit additional evidence for several reasons including any substantial cause. It is well-settled that it is for the assessee who makes the claim for deduction of an expenditure to adduce evidence in support of the claim. If any authority is needed, reference may be made to the judgement of the Supreme Court in CIT, West Bengal v. Calcutta Agency Ltd., (1951) 19 ITR 191. At page 196 it was observed that it is clear that in a claim for deduction of an amount contended to be an expenditure falling u/s.10(2)(xv) of the old Act, which corresponds to Section 37(1) of the new Act, the burden of proving the necessary facts in that connection is on the assessee. It is also a well-settled proposition, not only in the income-tax law but also under the general law that it is for the person who is in the knowledge of the facts relating to a claim to place them before the court or tribunal at the earliest point of time without waiting to be prompted by the court or tribunal. The adducing of additional evidence before the Tribunal under Rule 29 is not a matter of right but is conditioned by several requirements. No doubt, one of the requirements is that the additional evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led originally, total sales made through Virgo Polymers amounted to Rs. 608,83,30,100/-. We further find from the letter dt.22.5.07 written by the assessee to its advocate, a copy of which has been placed at page 48 of the original paper book, that the assessee has stated that the bullion sales to customers introduced by Virgo Polymers amounted to Rs. 608.83 Crores. This letter contained an annexure showing only 43 major customers introduced by Virgo Polymers, whereas the list given in pages 7 to 44 of the paper book filed under Rule 29 gives, on a rough estimate, more than thousand names. Not only that, the addresses of the customers have been given only in the first five pages and thereafter no addresses have been given. Thus, the reliability of the additional evidence is under question. Lastly, in the certificates dated. 1.8.2008 and 2.8.2008, the. assessee has sought to merely confirm its claim. These certificates are self-serving documents and do not add anything to the credibility of the evidence or to the evidentiary value. For these reasons, we are unable to hold that any substantial cause would be served by admitting the additional evidence. We, accordingly, reject the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wellery rings hollow, having regard to the nature of its activities and the line of business in which it was engaged. If anything, it is the assessee itself which, as manufacturers and exporters of fine jewellery in Bangalore, should have had business contacts with dealers in bullion. But we are asked to believe that the assessee did not have such contacts but it was Virgo Polymers, which was engaged in some other business in Chennai possessed such expertise and had contacts with buyers of bullion in Bangalore. It is not known, and there is nothing on record to show how Virgo Polymers knew the purchasers of gold bullion in the Bangalore bullion market. No evidence has been led before the Income-tax authorities regarding the expertise of Virgo Polymers in this behalf. It is also seen that though the sales have taken place throughout the accounting year, Virgo Polymers has raised a single debit note on 20.11.2003 for Rs. 2 Crores as their commission (page 53 of the paper book). According to the details filed by the assessee in pages 57 to 67 of its original paper book, a total sales of Rs. 608.83 Crores were made through Virgo Polymers between 1.4.2003 and 31.3.2004 on which commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would ensure that there were no bad debts and if there were any, they would make good the same. If such a term is included in the agency agreement, the agent would be a del credre agent which means that the agent will be responsible for any bad debts. We are unable to appreciate why this term was included as one of the functions of Virgo Polymers because in the course of the arguments before us, the learned counsel for the assessee did state that all the sales of bullion were for cash. It is generally known that in the bullion market transactions are put through only in cash and if really Virgo Polymers had an insight into the functioning of the bullion market, it would not have accepted such a term as one of its functions. Be that as it may, absolutely no evidence has been led to prove that Virgo Polymers did carry out any of the eight functions assigned to them. It may be that the assessee had filed some papers before the Income-tax authorities and it may even be that the commission payment was made by cheque. But the Income-tax authorities are not bound by the mere existence of the documents to hold that the payment was made wholly and exclusively for the purpose of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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