TMI Blog2005 (2) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT(A), dt. 2nd Jan., 1996, the AO passed the order under s. 250 and excluded 90 per cent of excise refund as per Expln. (baa) below s. 80HHC(4B), from the business profit of the assessee for computing the deduction under s. 80HHC of the IT Act. However, in the original assessment framed on 15th March, 1995, the AO had excluded a sum of Rs. 65,74,457 from the income eligible for deduction under s. 80HHC on the plea that it represented income from other sources. This sum of Rs. 65.74,457 was also inclusive of excise refund of Rs. 59,66,891. This excise refund represented the excise duty paid on the goods purchased for export. As there was no excise duty on the export items, the excise amount got refunded and, therefore, it was shown as income in the P L a/c. In an appeal filed by the assessee for treating such excise refund as income from other sources, the matter was restored by the CIT(A) to the file of AO for considering the matter afresh after verification of books of account and accounts of other parties from whom goods were purchased. The AO while giving appeal effect to this direction of the CIT(A), observed as under: "It is evident from such material placed on record tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs recorded by the CIT(A) to the effect that payment of excise duty has not reduced the business profit of the assessee, therefore, refund of excise duty paid should not be excluded from the business profit, had not been controverted by the Department. We are, therefore, inclined to agree with the learned Authorised Representative, that there is no infirmity in the order of the CIT(A) in directing the AO not to exclude 90 percent of such excise duty refund in terms of Expln. (baa), from the profit of business for computing deduction under s. 80HHC. 8. In the result, appeal of the Revenue is dismissed. 9. In the Revenue's appeal for the asst. yr. 1993-94, first ground relates to exclusion of sale of scrap, sundry balance written back and octroi refund, while computing deduction under s. 80-I of the IT Act, 1961. 10. We have heard the rival contentions and found from the record that while computing deduction under s. 80-I, the AO excluded the sale of scrap, sundry debtors written back and octroi refund and rent from the business income of the assessee on the ground that these incomes are not derived from the industrial undertaking, and, therefore, no claim of deduction under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above, we uphold the action of the CIT(A) regarding the inclusion of income of sale of scrap amounting to Rs. 3,02,336, eligible for deduction under s. 80-I, whereas we reverse the action of the CIT(A) with regard to other income of sundry debtors written back and octroi refund, included for computation of deduction under s. 80-I. We direct accordingly. 15. In the result this ground of Revenue's appeal is allowed in part. 16. Next grievance of the Revenue relates to computation of deduction under ss. 80HH and 80-I of the IT Act on Sarigam unit. However, it is not clear either from the ground of appeal raised by the Revenue nor by the submissions of learned Departmental Representative as to what is the real grievance of the Revenue, From the chart of grounds of appeal furnished by learned Authorised Representative during the course of hearing, this grievance of Revenue has been dealt by the AO at p. 15, para 4.4 and CIT(A) has dealt with the issue at p. 11, para 13, and relate to allowing deduction under s. 80HH/80-I on the profit without deducting the allowable deduction under s. 80HH/80-I of the IT Act. We, therefore, confine our decision to this limited extent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee had only claimed a sum of Rs. 1,51,688 under s. 35D and not Rs. 24,05,135. 21. In the result, this ground of the Revenue's appeal is dismissed. 2.2. Next grievance of the Revenue relates to advertising expenses and press announcement expenditure for public issue claimed as deduction under s. 37(3) of the IT Act. 23. We have heard the rival contentions and found from the record that expenditure incurred on advertisement and press announcement was treated by the AO as falling within the provisions of s. 35D. He, therefore, declined the assessee's claim for deduction of this expenditure under s. 37(3) of the Act. 24. By the impugned order, the CIT(A) observed that provisions of s. 35D(2)(c)(iv) pertain to only certain specified expenses in relation to issue for public subscription of the shares or debentures of a company. The other expenses not enumerated would, therefore, not be affected either way by these provisions. He, therefore, allowed the assessee's claim for deduction of this expenditure under s. 37(3). 25. The learned Departmental Representative relied on the order of the AO and submitted that such expenditure can be allowed only as per the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department is in appeal against the order of the CIT(A) before the Tribunal. 30. By the impugned order, the CIT(A) observed that while passing order under s. 143(3), the AO was having the appellate order of the assessee in his favour and merely the Department opting to file an appeal against the order of the CIT(A) to the Tribunal will not entitle the AO for not giving effect to the order of the CIT(A). 31. The issue regarding declining the deduction merely on the basis of not filing of auditors' report in the prescribed format along with return of income has already been decided by the jurisdictional High Court in favour of the assessee as reported in CIT vs. Gujarat Oil Allied Industries (1993) 109 CTR (Guj) 272 : (1993) 201 ITR 325 (Guj), wherein it was observed that filing of audit report along with the return is merely procedural in nature and requires only substantial compliance. The Tribunal, Delhi Bench, also in its order reported in Minda Huf Ltd. vs. Addl. CIT (2004) 82 TTJ (Del) 305 on the very same point held that non-furnishing of auditors' report will not disentitle the assessee's claim for deduction, if the same has been filed in the course of assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the course of assessment, the AO found that during the year, the assessee has received processing charges of Rs. 1,02,70,561. As per the AO, the said processing charges fall within the ambit of Expln. (baa) of s. 80HHC(4B) and, therefore, 90 per cent of such processing charges is required to be excluded from the 'profits of the business' for computing deduction under s. 80HHC. 38. By the impugned order, the CIT(A) observed that the expression "charges or another receipts of a similar nature" as given in Expln. (baa) has to be interpreted by applying the rule of 'ejusdem generis'. As per the CIT(A) only such charges or other receipts which are of the species, such as brokerage, commission, interest, rent are excludible to the extent of 90 per cent. The CIT(A) also recorded a finding that processing charges earned by the assessee-company are in the nature of trading receipt and merely because words used are "processing charges", the same cannot be excluded from the profits of the business. He, therefore, held that the AO was not justified to treat the sum of Rs. 1,02,70,561 to be in the nature of items prescribed for exclusion to the extent of 90 per cent in terms of Expln. (baa) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the language of the section. It implies that such words occurring in the provisions of the Act be read as accompanying them. Under Expln. (baa), the profits of the business for the purpose of 80HHC do not include receipts which do not have the element of turnover like rent, commission, interest, charges, etc. As some expenditure is incurred for earning such dormant income an ad hoc 10 per cent deduction from such income is provided for to account for those expenses. On the basis of facts and circumstances of each case, the AO has to ascertain whether receipt of brokerage, interest, commission, rent or charges of similar nature, were part of operational income. No standard tests for deciding what constitutes operational income can be laid down. The AO has to consider the nature of business; the nature of activity and such other factors to find out whether receipts are operational income or the dormant income of the assessee. The Department has to ascertain as to what is the dominant business of the company and whether receipts like rent, brokerage, interest, commission, etc., accrued as part of the main business activity or whether they accrued out of incidental business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is eligible for depreciation on the machinery "energy saving devices" at 100 per cent rate and not on the building meant for putting the energy saving devices. The AO held that such building can be very well treated as plant so as to eligible for normal rate of depreciation allowable to the plant and machinery and not at 100 per cent. The AO further stated that even though no addition to this category of block of building, which such energy saving equipment was placed, was made during the year under consideration, but the assessee has made an addition to the building in the asst. yr. 1992-93 and considering the same as plant and machinery, the assessee claimed 100 per cent depreciation. As per the AO, the issue of claim on depreciation on the block of building was examined last year in details and it was held that since equipment in respect of which specialised structure of building was not energy efficient, the assessee is not entitled to get 100 per cent depreciation. The AO, however, allowed 25 per cent depreciation on such structure by observing that as per the photographs of the building, it appears that specialised for the energy saving equipment and hence it can be treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed by the learned Authorised Representative, hence, the same is dismissed in limine, as having not been pressed. 48. Next grievance of the assessee relates to treatment of interest income of Rs. 72,01,854, earned on temporary investment of share application money. The brief facts are that during the year under consideration, the assessee made a public issue of equity shares on 17th Feb., 1992, for its expansion project. The amount received on application money was put in the bank as deposits and an interest income of Rs. 72,01,854 was earned on such bank deposits. The AO observed that as per the computation of total income filed along with return of income, the assessee has claimed a deduction of interest on public issue deposit. The AO held that interest on deposit of share application money is income from other sources. The same is liable to be taxed separately and not deductible either in public issue expenses account nor to be capitalised towards the cost of assets. It was submitted before the AO that in terms of prospectus for public issue and in accordance with the s. 73(3) of the Companies Act, 1956, the assessee was required to keep the share application money in sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the issue is squarely covered in favour of the Revenue by the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkalies Fertilisers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) in which it was held that the interest earned by the assessee before the commencement of the business on the short-term deposits with the banks out of term loans secured from the financial institutions, is income chargeable under the head income from other sources. He, therefore, justified the orders of lower authorities. 51. We have considered the rival contentions and gone through the orders cited by the learned Authorised Representative in the case of Neha Proteins wherein after considering the judgment of Hon'ble Supreme Court in the case of Tuticorin Alkalies and subsequent decision of the Supreme Court in the case of CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC), the Tribunal held that where the assessee had gone for public issue of equity shares, so as to finance the expansion of its existing business and assessee has incurred certain expense on public issue, the amount received on share application money, which was kept in bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Stock Brokers Ltd. observed that where deposits with bank are kept under mandatory situation, the assessee is entitled to set off of interest income against the share issue expenses. 53. The crux of the issue revolves around treatment of interest income on the deposits given to the bank, as to whether the interest income was capital receipt or revenue receipt. There is no dispute to the general principle that interest income bears the character of revenue receipt. But, this general principle is subject to the exception that when such interest income is received prior to the commencement of business or for expansion of business of industrial undertaking and is having direct and proximate connection with the acquisition of fixed/capital asset during the course of implementation of the project, such interest income will take the character of capital receipt. This exception is also subject to further restriction that deposit on which interest income was earned was given out of business compulsion/statutory requirement, in order to enable the assessee to facilitate acquisition of fixed assets and not as a sweetwill with an intention to earn interest income thereon. If the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not seize to be his income." 57. The Hon'ble Supreme Court further observed that the company had taken term loan from various banks and financial institutions for the purpose of setting up of the factories. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with the banks. The company also gave interest bearing loans to the employees to purchase vehicles. The interest earned by the company from the above deposits and loans was sought to be capitalised reducing the preoperative expense. On the facts and circumstances, the Supreme Court held that interest flowing from such investments is taxable income and is to be taxed under the head "Income from other sources". The interest paid by the company on such borrowed funds cannot be allowed as deduction under s. 57 of the IT Act. Since the business has not commenced, the expenditure in the form of interest paid cannot be allowed as deduction under the head "Business" and thereby get adjusted against the income from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved on public issue. Thus, income earned on such deposits was incidental to the public issue which in turn was for expansion of the assessee's project. In view of the peculiar facts and circumstances of the case, the ratio laid down by the Supreme Court in the case of Tuticorin Alkalies Fertilisers Ltd. will not be attracted, wherein surplus money available with the assessee was parked in the bank for earning interest income thereon. More appropriate decision for application in the factual situation of the present case are Bokaro Steels Ltd. and Karnal Co-operative Sugar Mills Ltd. The decision of Tribunal, Jodhpur and Mumbai Benches, cited by the learned Authorised Representative and discussed hereinabove are directly in favour of the assessee on the very same issue in which interest received on deposit of share application money, which was statutorily required to be deposited in the bank and the interest income earned thereon, Was held to be liable to be set off against the expenses on public issue/expansion project. No contrary decision to this effect was brought to our notice by the learned Departmental Representative. Respectfully following these decisions of co-ordinate Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excise duty and sales-tax from the total turnover while computing deduction under s. 80HHG, has already been decided in favour of the assessee in view of the Special Bench decision in the case of IFB Agro Industries vs. Dy. CIT (2003) 78 TTJ (Cal)(SB) 177 : (2002) 83 ITD 96 (Cal)(SB), wherein it was held that receipts of excise duty and sales-tax do not include an element of profit, therefore, not to be included in total turnover while computing deduction under s. 80HHC. Same view had been taken in the case of CIT vs. Chloride India Ltd. (2002) 178 CTR (Cal) 432 : (2002) 256 ITR 625 (Cal). 70. In view of above, we are inclined to allow this ground of assessee's appeal. 71. In ground No. 8(b), the assessee has grievance that the AO has taken the export sales as booked in the accounts, where the same should have been considered on the basis of export turnover determined under s. 80HHC of the IT Act. From the order of the CIT(A), we find that he has not fully dealt with the issue. We, therefore, restore this issue to the file of CIT(A) for deciding afresh as per the law, after giving reasonable opportunity to the assessee. 72. Ground NO.9 regarding the computation of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more entitled to claim deduction under s. 36(1)(iii) solely for the purpose of computation of tax liability. 77. The learned Authorised Representative contended that issue is already decided by the jurisdictional High Court in favour of the assessee in Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416: (2001) 251 ITR 61 (Guj). 78. On the other hand, learned Departmental Representative relied on the orders of lower authorities. 79. We have considered the rival contentions and are in agreement with the learned Authorised Representative that entire controversy has been resolved in case of Core Healthcare. wherein it was observed that notwithstanding capitalisation of interest in the books of account the assessee is eligible to claim such interest under s. 36(1)(iii). While so holding reliance was placed on the ratio of the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC). 80. In view of the above, we find that the issue has already been decided in favour of the assessee by judgment of jurisdictional High Court reported at (2001) 251 ITR 61 (Guj) in case of Core Health care. As the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X
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