TMI Blog2018 (12) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer has shown the same as loss on account of exchange fluctuation and not as a provision - Decided in favour of the assessee. Income eligible for deduction under Section 80IB - Interest from deposit with Tamil Nadu Electricity Board and Interest received from housing and vehicle loans advanced to its employees - Held that:- It is not disputed by the Revenue that the assessee borrows amounts from the bank at a higher rate of interest and extends housing and vehicle loans to its employees at subsidised rates. Thus, these loans and advances being incentives to the employees, has to be held to be directly relatable to the interest of industrial undertaking. In Arul Mariammal Textiles Limited [2018 (8) TMI 1729 - MADRAS HIGH COURT] we had an occasion to consider similar issue and after taking note of several decisions on the point, decided the question in favour of the assessee holding that the interest income earned by the assessee is merely incidental and not the prime purpose of doing the act in question -it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of the Revenue that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shmi Valli, learned counsel for the appellant and Mr.Karthik Ranganathan, learned Senior Standing Counsel for the Revenue. 5. The Assessee is a Joint Venture between an American company and an Indian company. For the Assessment Year 1998-1999, the Assessee filed return of income on 26.11.1998 admitting the total income of ₹ 31,98,355/- under regular computation and ₹ 4,67,73,600/- under Section 115JA of the Income Tax Act, 1961 (in short, the Act ). An intimation under Section 143(3) of the Act was issued on 22.06.1999, pursuant to which, a scrutiny order was passed on 28.02.2001. Thereafter, a notice under Section 148 was issued on 22.03.2005 for the reason that the loss arising on account of foreign exchange fluctuation amounting to ₹ 59,70,000/- was not allowable in the computation of income under Section 115JA of the Act, in so far as the same was an 'unascertained liability' for the purposes of computation of book profit under Section 115JA. Accordingly, the amount was treated as an unascertained liability and added back to the book profits in the computation of income under Section 115JA. 6. The Assessee filed an appeal against the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion claimed under Section 80IB and held that the following would be ineligible for deduction under Section 80IB, namely, (i) interest from deposits with TNEB ; (ii) interest received from Housing and Vehicle Loans advanced to its employees ; (iii) interest on advances made to suppliers ; and (iv) Discounts from suppliers and service providers. 11. The Assessee filed an appeal before the CIT(A), who accepted the Assessee's contention in respect of item Nos.(i) and (iv) supra and rejected the Assessee's contention in respect of item Nos.(ii) and (iii) supra. Aggrieved by that portion of the order passed by the CIT(A), the Assessee filed an appeal before the Tribunal contending that for the purpose of its business activities, it had applied for an HT electricity service connection with TNEB and to obtain sanction of the same, a mandatory Caution Money Deposit has to be made, without payment of which, the electricity connection will not be provided. It was contended that since the activities carried on by the Assessee required the aid of power, the Caution Money Deposit was made by the Assessee, which earned interest and this interest has a direct nexus with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, therefore, an ascertained liability for the purpose of Clause (c) of Explanation to Section 115JA of the Act. The further case of the Assessee is that the decision in Sterling Steels and Wires Limited is distinguishable on facts and that the Tribunal erred in not following the decision in the Assessee's own case. 16. Ms.S.Sree Lakshmi Valli, learned counsel for the appellant contended that for the import, the Assessee had to effect payments on or before 31st March of the relevant year and the amount having not been paid, the rate of the foreign exchange as on 31st March was taken into account and accordingly, the same was calculated and therefore, it cannot be treated as an unascertained liability. 16.1. Learned counsel referred to the decision in CIT V. Woodward Governor India (P) Ltd., (2009) 312 ITR 0254 and submitted that the income of the Assessee is decided only in terms of the system of accounting and therefore, the accounting method followed by an Assessee continuously for a given period of time needs to be presumed to be correct, till the Assessing Officer comes to the conclusion, for reasons to be given, that the system does not reflect true and correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) for the proposition that while assessing a company for income tax under Section 115J, the correctness of the profit and loss account prepared by the Assessee and certified by the Statutory Auditors of the company and prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956 cannot be examined by the Assessing Officer and the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account, except to the extent provided in the Explanation to Section 115J. 16.7. Relying upon the Assessee's own case in TC.A.No.1151 to 1153 of 2007, dated 18.12.2012, for the Assessment Years 1996-1997, 1997-1998 and 1998-1999, it is submitted that the said decision was rendered in favour of the Assessee by following the decision of the Hon'ble Supreme Court in the case of ONGC Ltd., V. CIT, (2010) 322 ITR 180 (SC). Therefore, it is contended that loss on account of foreign exchange fluctuation is allowable in respect of payments not yet made as at the close of the relevant accounting year. It is further submitted that loss, where, the accounting was on mercantile basis, on account of fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, (T.C.A.No.909 of 2008, dated 07.08.2018), wherein, the Assessee was required to furnish a fixed deposit, which was a pre-condition to enable the Assessee to open a foreign Letter of Credit for the purpose of import of critical components for manufacture of wind mill and this incidentally had earned some interest and it was held that such income is not liable to be assesseed and is eligible to be claimed as deduction. 18.1. Reliance was placed on the decision of this Court in CIT V. The Madras Motors Ltd., (2002) 257 ITR 0060 (Mad.), wherein, it was held that the interest earned by the Assessee on belated payments from purchase of product was directly relatable to the business of the Assessee and the true test would be whether such interest would be available to the Assessee otherwise also and the answer to the question would be certainly in negative. 19. Learned counsel for the Revenue would contend that the income should come from the core activity and in the instant case, the core activity is not giving loans and advances to the employees nor giving advances to suppliers. Further, it is submitted that the need to give advances to suppliers is not always compulsory an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer to delete the said amount of ₹ 59.70 Lakhs from the book profits. 24. The Revenue filed appeal before the Tribunal contending that the decision of the Tribunal in the assessee's own case for the assessment years 1996- 97 to 1998-99 had not attained finality and the said decision was rendered in the context of normal computation (deduction) and the CIT(A) should have appreciated that only provision for ascertained liability can be allowed under Section 115JA. The Tribunal accepted the case of the Revenue holding that the earlier order passed by the Tribunal was not in relation to the computation of book profit under Section 115JA but, relating to computation of income in normal course. The Tribunal referred to Explanation (c) to Section 115JA. Further, it held that exchange fluctuation is not an ascertained liability on the date of balance sheet, as the liability is ascertained only on the date of payment and the Explanation (c) to Section 115JA is squarely applicable and reversed the decision of the CIT(A). 25. In Woodward Governor India (P) Ltd. (supra), two substantial questions of law arose for consideration, which were considered by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Bench, following the decision of the Hon'ble Apex Court in ONGC Ltd. (supra), held that the restatement of the liability itself came at the end of the accounting year on account of the foreign exchange fluctuation and thereby, the assessee was stated to have been saddled with the loss arising out of the restatement of the liability. Following the decision in ONGC Ltd. (supra), it was further held that the restatement had come at the end of the accounting year and the liability itself was on account of exchange fluctuation and accordingly, the appeal filed by the Revenue was dismissed. 29. In Apollo Tyres Ltd., (supra), the Hon'ble Apex Court held that while assessing a company for income tax under Section 115J, the correctness of P L account prepared by the assessee and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Part II and Part III of Schedule VI to the Companies Act, 1956 cannot be examined by the Assessing Officer and he does not have jurisdiction to go behind the net profit shown in the P L account except to the extent provided in the Explanation to Section 115J. 30. In Echjay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax v. Woodward Governor India P. Ltd., [2009] 312 ITR 254 (SC). Although the ratio in paragraph 15 is sufficient to answer the questions under consideration, we intend referring to the process of reasoning leading to it as well. In that case, the Supreme Court raised the following question and made the following observations in regard thereto:- 3. In this batch of civil appeals, the following questions arise for determination: (i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under Section 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word expenditure in Section 37(1) connotes what is paid out and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in Indian Molasses Co. [AIR 1959 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.). It is this principle which attracts the provisions of Section 145. That section recognises the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under Sections 30 to 43-C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word paid in Section 43(2), which is used in several sections i.e. Sections 30 to 43-C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under Sections 28/29. That is why in deciding the question as to whether the word expenditure in Section 37(1) includes the word loss one has to read Section 37(1) with Section 28, Section 29 and Section 145(1). One more principle needs to be kept in mind. ITA-136-2015 - 12 - account the value of the stockin- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading Section 37(1) with Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 37(1) of the 1961 Act. (emphasis supplied) The judgment of the Supreme Court clearly applies to the present case. The Tribunal, accordingly, rightly deleted the addition. 32. The Revenue seeks to sustain the order passed by the Tribunal on the ground that the exchange fluctuation is not an ascertained liability on the date of balance sheet and it is only a provision and the liability will become an ascertained liability only on the date of payment and therefore, Explanation (c) to Section 115JA is squarely applicable and the order passed by the Tribunal is just and proper. 33. To be noted that in the assessee's own case in T.C.(A) Nos.1151 to 1153 of 2007, identical question was considered in the sense as to whether the Tribunal was right in holding that the loss, where the accounting was on mercantile basis, the loss on account of exchange fluctuation could be claimed and deducted even in a year prior to the payment in foreign exchange. The assessee, for the relevant assessment year, claimed loss on exchange fluctuation, which was disallowed by the Assessing Officer on the ground that the loss suffered at the time of actual payment would be allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h regard to the interest received on advances paid to suppliers. 40. We find that this issue was contested by the assessee and appears to have been inadvertently omitted while framing the substantial question of law when the appeal was lodged. Accordingly, we re-frame the substantial questions of law as hereunder:- (a) Whether on the facts and in the circumstances of the case, the interest received from the employees and paid over to the HDFC on account of the loan availed by the employees from HDFC is income in the hands of the appellant and whether the same if treated as income is not eligible for relief under Section 80IB? . (b) Whether on facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that interest received on advances paid to suppliers cannot form part of business income for the purpose of deduction u/s.80IA of the Income Tax Act ? 41. The Assessing Officer held that interest from housing and vehicle loan has no nexus to the business of the assessee and hence, immediate and effective source is not the business of the undertaking (the assessee). Accordingly, the Assessing Officer excluded these receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48. In Liberty India vs. Commissioner of Income-tax [(2009) 183 Taxman 349 (SC)], the assessee claimed deduction under Section 80IB on the increased profits earned/derived on account of Duty Entitlement Passbook (DEPB) Scheme and Duty Drawback Scheme. The Assessing Officer denied the deduction on the ground that the said two benefits constituted export incentives and that they did not represent profits derived from an industrial undertaking. We have to consider as to what would be the appropriate test. 49. In Madras Motors Ltd. (supra), the Division Bench held that the true test would be whether such interest would be available to the assessee otherwise also, as in the said case, the assessee earned interest on belated payments from purchase of products and if the answer to the question is in the negative, the assessee would be entitled for the deduction. Admittedly, the assessee does not carry on the business of financing for housing loan and or for vehicles. The benefit/concession is extended to the employees of the assessee as a part of a labour welfare package. 50. It is not disputed by the Revenue that the assessee borrows amounts from the bank at a higher rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the factual position of the Assessee's case. The margin money by way of fixed deposit was available with the Assessee's bankers so as to enable the Bank to open a Foreign Letter of Credit, which was essential for the purpose of import of critical components for the purpose of manufacture of the wind mill for generation of electricity. 12. Firstly, we note that the case of Pandian Chemical's arose out of a claim under Section 80HH of the Act. The Assessee therein had made deposits with the Tamil Nadu Electricity Board, which had earned interest. The question arose was whether interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived on the part of the industrial undertaking for the purpose of Section 80HH of the Act? 13. The Supreme Court referred to the decision of the Privy Council in the case of CIT V. Raja Bahadu Kamakhaya Narayan Singh, (1948) 16 ITR 325 (PC), and held that the although electricity may be required for the purposes of an industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking and the derivation of profits on deposits made with the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business would qualify for deduction under Section 80IA of the Act. In our view, the decision rendered in the case of T.T.G. Industries Limited would squarely apply to the case on hand. 16. In the case of Priviera Home Furnishing V. Additional CIT, (2016) 237 Taxmann 520 (Delhi), the Assessee has stated that the interest on Fixed Deposit Receipts was received as margin money kept in the bank for utilization of Letter of Credit and Bank Guarantee limits and the Court held that the decision of the Tribunal that such interest bears the requisite characteristic of business income and has nexus to the business activities of the assessee cannot be faulted with. This decision also supports the case of the Assessee. 17. Equally, the decision in the case of CIT V. Shah Alloys Limited, (2017) 396 ITR 0711 (Guj), where, the Assessee had deposited money to open a Letter of Credit for the purchase of the machinery required for setting up its plant in terms of the agreement with the supplier and the money so deposited earned some interest, which was claimed as deduction. The Court held that it is not the case, where, any surplus share capital money, which is lying idle has been deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered view, this will be the right test to be applied to the case on hand and essentially, the answer to the substantial question should be in favour of the Assessee. 20. In the case of CIT V. Jaypee DSC Ventures Ltd., CDJ 2011 DHC 308, the Court held that the deposit made by the Assessee was not the surplus money lying idle with it to earn interest, but it was the amount of interest earned from fixed deposit, which was kept in the bank for the purpose of furnishing the Bank Guarantee. In our view, this decision also will enure in favour of the Assessee. 21. Equally is the decision in the case of CIT V. Paramount Premises (P) Ltd., (1991) 190 ITR 259 (Bom), wherein, analysing the purpose, for which, the deposits were made by the Assessee and the interest earned thereon, the Bombay High Court affirmed the view of the Tribunal to the effect that the entire interest earned from the business activity of the Assessee and did not arise out of any independent activity. 22. The sheet-anchor of the submission of the learned counsel for the Revenue is based on the decision of the High Court of Himachal Pradesh in Himachal Futuristic Communication Ltd. V. CIT, (2014) 42 taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome would be amenable to deduction, the effective source of income is to be looked at. Thus, essential factual matrix needs to be looked to arrive at a conclusion as to the effective source from which such income earned and if it is found that it is derived from secondary source, it is not the effective source, which falls outside the purview of such like provision, which provides for deduction. 25. In the instant case, the requirement of the Assessee to furnish the fixed deposit was a pre-condition to enable the Assessee to open a foreign Letter of Credit for the purpose of import of critical components for the manufacture of wind mill. This incidentally had earned some interest. As pointed out by the Hon'ble Supreme Court in Shree Rama Multi Tech Limited, it is not the Assessee's surplus money, which was deposited by way of fixed deposit, which had earned interest ; on the contrary, it was a pre-condition for the purchaser/Assessee to enable him to import the critical component for the purpose of manufacturing. Furthermore, it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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