Jvs Exports v. Asst. Commissioner Of Income-Tax,Circle-I, Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRAS Judgment Reserved On Judgment Pronounced On 15.07.201923.07.2019 CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMand THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case (Appeal) No.2079 of 2008 JVS Exports,32, Sarojini Street,Madurai-625 002. .. Appellant/Appellant -vs- Asst. Commissioner of Income-tax,Circle-I, Madurai... Respondent/Respondent APPEAL under Section 260A of the Income-tax Act, 1961,against the order dated 29.09.2008 on the file of the Income-taxAppellate Tribunal Bench 'B', Chennai in I.T.A.No.1741/Mds/2007for the assessment year 2004-05. against the Order of theCommissioner of Income Tax (Appeals)-1, Madurai dated 21.03.2007in ITA.No.0317/06-07 and against the order of the AssistantCommissioner of Income Tax Circle-I, Madurai dated 27.12.2006and made in AABFJ 2836N. T.S.Sivagnanam, J. JUDGMENT This appeal, filed by the appellant/assessee under Section260A of the Income-tax Act, 1961 (hereinafter referred to as“the Act”), is directed against the order dated 29.09.2008, https://hcservices.ecourts.gov.in/hcservices/ passed by the Income-tax Appellate Tribunal Bench 'B', Chennai(“the Tribunal”, for brevity) in I.T.A.No.1741/Mds/2007, for theassessment year 2004-05. 2.The above appeal has been admitted, on 23.06.2009, on thefollowing substantial question of law:-“Whether on the facts and in the circumstancesof the case the Tribunal is right in holding thatinterest income assessed as “business income” isto be excluded from the 'profits and gains ofbusiness” for purposes of Section 80HHC and if sowhether the gross or net interest is excludable?” 3.The assessee is a firm engaged in the business ofmanufacture, sale and export of handloom towels and other items.The assessee filed its return of income for the assessment yearunder consideration (2004-05), on 11.10.2004, declaring a totalincome of Rs.1,67,29,196/-, which was processed under Section143(1) of the Act, on 23.02.2005. The case was selected forscrutiny and after hearing the assessee's authorisedrepresentative, the assessment was finalized under Section 143(3) of the Act, on 27.12.2006, determining the total income atRs.3,01,57,640/-. 4.The assessee filed appeal before the Commissioner ofIncome-tax (Appeals)-I, Madurai (for brevity, “the CIT(A)”),contending that the Assessing Officer has included sales tax andexcise duty as part of total turnover for the purposes ofworking out the eligible deduction under Section 80HHC of theAct contrary to the facts, as there was no such collection inthe assessee's case. It was further contended that theAssessing Officer has excluded gross interest receipts assessedunder the head “profits and gains of business” which has a nexuswith the export activity and which has been netted by theassessee. Further, the Assessing Officer has denied reliefunder Section 80HHC of the Act in respect of export incentiveslike DEPB without appreciating the law and facts of the casewhile the assessee has incurred a loss on its transfer. It wasfurther contended that the Assessing Officer has included quotasales which were wrongly admitted as coming under Section 28(iiia) to 28(iiic) while excluding items under Clause (baa)under Explanation to Section 80HHC. With the above, theAssessing Officer has computed a total turnover, which is notreconcilable with the figures submitted in this regard. 5.Before the CIT(A), it was argued that the AssessingOfficer erred in not netting the interest receipts and interestpayments especially when both have a nexus with the exportactivity. The Assessing Officer failed to note that such anetting has been upheld by the Tribunal in Lalsons Enterprisesvs. DCIT reported in [2004] 89 ITD 25 (SB) Delhi and explained https://hcservices.ecourts.gov.in/hcservices/ 5.Before the CIT(A), it was argued that the AssessingOfficer erred in not netting the interest receipts and interestpayments especially when both have a nexus with the exportactivity. The Assessing Officer failed to note that such anetting has been upheld by the Tribunal in Lalsons Enterprisesvs. DCIT reported in [2004] 89 ITD 25 (SB) Delhi and explained https://hcservices.ecourts.gov.in/hcservices/ in DCIT vs. Paramount Trading Corporation reported in [2006] 98ITD 77 (TM) Delhi. The decisions relied on by the AssessingOfficer were distinguished as being inapplicable to the facts ofthe assessee's case. The assessee placing reliance on thedecision in CIT vs. A.S.Nizar Ahmed & Co., reported in [2003]259 ITR 244 (Mad.), contended that in the said decision, it hasbeen held that where there is a link with the export business,interest has to be netted. 6.With regard to the first ground, viz., against inclusionof sales tax and excise duty as part of total turnover for thepurpose of computation of deduction under Section 80HHC, theassessee succeeded before the CIT(A). 6.1. With regard to the second ground, against not nettingthe interest receipts and interest payments while computingdeduction under Section 80HHC, the CIT(A) applied the decisionin the case of CIT vs. Chinnapandi reported in [2006] 201 CTR 13 (Mad.) and rejected the contention of the assessee. 6.2. The third ground with regard to the decision of theAssessing Officer adopting the entire sale proceeds of DEPB forthe purpose of application of sub-Section (baa) to Explanationto Section 80HHC, the CIT(A) allowed the assessee's case anddirected the Assessing Officer to modify the computation,accordingly. 7.Thus, the assessee is before us only with regard to theissue whether the Tribunal is right in holding that interestincome assessed as business income is to be excluded from the“profits and gains of business” for purposes of Section 80HHCand if so whether gross or net interest is excludable. 8.Before the Tribunal, the assessee contended that theinterest earned bears direct nexus with the business of theassessee and it should be treated as business income. Further,only net interest is to be considered, since in the assessee'scase, no interest was negative figure and no amount should beconsidered for exclusionary purpose. 9.The Tribunal applied the decision in the case of DollarApparels vs. ITO reported in [2007] 294 ITR 484 (Mad.) and heldthat interest on deposit is not entitled for special deductionunder Section 80HHC, as it bears no nexus with the exportearning. 10.Mr.R.Srinivasan, learned counsel appearing for theassessee contended that the Tribunal ought to have noted thatsince the deposit made with the bank is obligatory in terms ofthe certificate issued by the bank, the interest income has tobe treated as a business income and the decision in the case of https://hcservices.ecourts.gov.in/hcservices/ A.S.Nizar Ahmed & Co. (supra) ought to have been applied by theTribunal. In support of his contention, the learned counselplaced reliance on the decisions in CIT vs. Bangalore ClothingCo., reported in [2003] 260 ITR 371 (Bom.);CIT And Anr. vs. Motor Industries Co. Ltd., reported in[2011] 331 ITR 79 (Kar.);Aurobindo Pharma Ltd., vs. CIT reported in [2015] 370 ITR216 (T&AP);CIT vs. TTK LIG Ltd., reported in [2018] 409 ITR 390 (Mad.);CIT vs. Abdul Rahman Industries reported in [2007] 293 ITR475 (Mad.); andArul Mariammal Textiles Ltd., vs. Assistant Commissioner ofIncome-tax, Coimbatore reported in [2018] 97 taxmann.com 298(Mad.). https://hcservices.ecourts.gov.in/hcservices/ A.S.Nizar Ahmed & Co. (supra) ought to have been applied by theTribunal. In support of his contention, the learned counselplaced reliance on the decisions in CIT vs. Bangalore ClothingCo., reported in [2003] 260 ITR 371 (Bom.);CIT And Anr. vs. Motor Industries Co. Ltd., reported in[2011] 331 ITR 79 (Kar.);Aurobindo Pharma Ltd., vs. CIT reported in [2015] 370 ITR216 (T&AP);CIT vs. TTK LIG Ltd., reported in [2018] 409 ITR 390 (Mad.);CIT vs. Abdul Rahman Industries reported in [2007] 293 ITR475 (Mad.); andArul Mariammal Textiles Ltd., vs. Assistant Commissioner ofIncome-tax, Coimbatore reported in [2018] 97 taxmann.com 298(Mad.). 11.Ms.S.Premalatha, learned Junior Standing Counsel,assisted by Mr.M.Swaminathan, learned Senior Standing for theRevenue sought to sustain the order passed by the Tribunal byplacing reliance on the decisions in Rani Paliwal vs. CITreported in [2004] 136 Taxman 135 (Punj. & Har.);CIT vs. Liberty Footwear Co., reported in [2006] 287 ITR 339(Pun. & Har.); andK.S.Subbiah Pillai & Co. (India) (P.) Ltd., vs. CIT reportedin [2004] 134 Taxman 735 (Mad.). 12.Alternatively, it was submitted that facts need to beexamined in an appropriate manner and for which purpose, theCourt may remand the matter for fresh consideration as was donein the case of CIT vs. M/s.Rane Engine Valves Ltd.[T.C.A.No.1168 of 2008, dated 19.11.2018]. 13.Before the assessing Officer, the assessee contended thatall deposits made with the bank were from and out of the exportsale proceeds, deposits were made for availing the workingcapital loan from Central Bank of India, all the deposits weremarked as collateral security and in the course of exportbusiness, which is the only business of the assessee, it availedloans and paid interest and while paying interest on the loanstaken for the export business, the interest on these depositsare to be reckoned and the net only is the interest to beeffectively paid on the loans obtained. This argument of theassessee was not accepted by the Assessing Officer on the groundthat any income to be called as business income and to qualifyfor deduction under Section 80HHC, should have direct nexus withexport activity and even though the Fixed Deposits were kept forbusiness and the interest is in the nature of receipt, it doesnot qualify to be called business income. 14.The learned counsel for the assessee has drawn theattention of this Court to a letter dated 10.03.2006, addressedby the Central Bank of India to the assessee stating that they https://hcservices.ecourts.gov.in/hcservices/ are advancing loans to the assessee for their export businessand to ensure the safety of advances, the bank diverts some ofthe export sale proceeds on realisation towards Fixed Depositsin the name of the assessee being additional security for theloan as has been the practice right from the beginning. 15.The question would be as to whether this interest has anydirect nexus to the business activity of the assessee, viz.,exports. 14.The learned counsel for the assessee has drawn theattention of this Court to a letter dated 10.03.2006, addressedby the Central Bank of India to the assessee stating that they https://hcservices.ecourts.gov.in/hcservices/ are advancing loans to the assessee for their export businessand to ensure the safety of advances, the bank diverts some ofthe export sale proceeds on realisation towards Fixed Depositsin the name of the assessee being additional security for theloan as has been the practice right from the beginning. 15.The question would be as to whether this interest has anydirect nexus to the business activity of the assessee, viz.,exports. 16.In Bangalore Clothing Co. (supra), similar issue arosefor consideration and the Court held that the Department cannotinvoke Explanation (baa) in every matter involving receipts byway of brokerage, commission, interest, rent, labour charges,etc., and these items of income have to be seen in the contextof the business activity of the assessee. It was pointed outthat the Assessing Officer will have to ascertain whether thereceipt of interest, commission, labour charges, etc., were apart of operational income. It was further pointed out that theCourt cannot lay down any standard test for deciding what wouldconstitute operational income and the Department will have toconsider the memorandum of articles of association of company,the nature of the business, the nature of the activity and suchother tests. Further, the Department will also have toascertain as to what is the dominant business of the company andwhether receipts like interest, commission, etc., accrue as apart of the main business activity or whether they accrue out ofincidental business. In the said case, the Tribunal, on facts,found that the job processing activity done by the assessee waslinked to the manufacturing activity and affirmed the finding ofthe Tribunal holding that 90 per cent of labour charges oughtnot have been excluded from such business profits whilecomputing deduction under Section 80HHC. 17.In Motor Industries Co. Ltd. (supra), the substantialquestion of law which was considered was whether the incomereceived by the assessee towards developmental work in thecourse of its export business which is different from the incomearising out of the business of export out of India of any goodsare merchandise is liable to be reduced by 9 per cent asprovided under Clause (1) of Explanation (baa) to Section 80HHCof the Act. It was held that in computing the profits of thebusiness for the purpose of Explanation (baa), the incomes whichare deductible are those which are expressly prescribed in theaforesaid provision and which are similar in nature. It wasfurther held that if the income is derived out of the activitywhich would have direct and immediate nexus to the activity ofexport, then such income is not deductible from the said profitsof the business under the aforesaid provisions. It was pointedout that the expression “any other receipt of a similar nature”has to be understood in the context of the words proceeding the said expression, viz., “brokerage”, “commission”, “interest”,“rent” or “charges”, such receipts have no nexus with the incomeearned by way of foreign exchange. It was further pointed outthat every receipt is not income and every income would notnecessarily include element of export turnover. Thus, the basicrequirement of Section 80HHC is earning in foreign exchange andretention of profits for export business and such benefit shouldgo only exporters and should not be misused in getting thebenefit when there is no element of export involved in theincome. In the said case, on facts, it was found that theassessee is in the business of export of goods and merchandise,the assessee was earning foreign exchange our of that export andthe disputed income is earned by the assessee for its feestowards development work and the developmental work isintimately connected with the business of manufacture and saleof goods by the assessee and there is immediate nexus betweenthe activity of export and the developmental work. Thus, it washeld that the Tribunal was justified in holding that the saidconsideration received for developmental work is not liable tobe deduced under Clause (baa) in computing the profits of thebusiness. 18.Similar view was taken in Aurobindo Pharma Ltd. (supra)by placing reliance on the decision in Bangalore Clothing Co. (supra). 19.In TTK LIG Ltd. (supra), it was held that the Tribunalwas right in holding that exchange fluctuation, provisionwritten back should be treated as income derived out of businessfor computation of deduction under Section 80HHC. 20.In Abdul Rahman Industries (supra), the substantialquestion of law, which fell for consideration was whether theassessee was entitled to deduction under Section 80HHC inrespect of a sum being unclaimed balances written back in theprofit and loss account. The case was decided in favour of theassessee holding that there were credits appearing in the bookson the basis of purchase of items from various suppliers andthese suppliers were not paid and these unclaimed creditbalances were brought to the profit and loss account and hademanated from trading transactions only and the transactionswere connected or closely linked with the assessee's businessactivities and the receipts had arisen only out of ordinarytrading transactions and hence were rightly assessed under thehead “Business” and the assessee was entitled to the benefitunder Section 80HHC. 21.In Arul Mariammal Textiles Ltd. (supra), it was held thatinterest on margin money by way of Fixed Deposit kept with theassessee's banker so as to enable the bank to open a foreignletter of credit which was essential for purpose of import of https://hcservices.ecourts.gov.in/hcservices/ critical components for carrying on business of the assessee waseligible for deduction under Section 80-IA. 22.As pointed out by us earlier, the bank from which theassessee availed loans for their export business, in nouncertain terms had mentioned that from and out of the exportsale proceeds, they (bank) would divert some of it uponrealisation of the sale proceeds towards Fixed Deposits in thename of the assessee being additional security for the loans.Thus, it is seen that the conversion of a portion of the exportsale proceeds on realisation as Fixed Deposits was not on thevolition of the assessee, but by a unilateral act of the bankover which, the assessee had no control. Furthermore, the bankhad made it explicitly clear that the Fixed Deposits are createdfor being treated as additional security for the loans availedby the assessee. The Revenue does not dispute the fact that theloans availed by the assessee was for their export business. 23.In such circumstances, there can be no dispute to thefact that these receipts have a direct and immediate nexus tothe activity of export done by the assessee and in suchcircumstances, the said income is not deductible from the saidprofits of business. The Revenue cannot dispute the immediatenexus between the activity of export and the creation of FixedDeposits to be retained by the bank as additional securitytowards the loan availed for the export business. 24.In Rani Paliwal (supra), relied on by the Revenue, thequestion was whether the Tribunal was legally correct in holdingthat the claim for deduction in respect of income from FixedDeposit Receipts (FDRs) was not substantial, despite contraryand consistent view having been expressed by the Bombay HighCourt in the cases of CIT vs. Paramount Premises (P.) Ltd.,reported in [1991] 190 ITR 259 (Bom); and CIT vs. Nagpur Engg.Co. Ltd., reported in [2000] 245 ITR 806 against which, theSpecial Leave Petition of the Department was dismissed. 25.On perusing the judgment, we find the issue before theTribunal in the said case was not as to whether the interestincome received from the Fixed Deposits had any bearing on thebusiness of the assessee. In any event, the appeal filed by theassessee was dismissed on the ground that there is nosubstantial question of law arising in the appeal. Therefore,this decision cannot be cited as a precedent by the Revenue. 26.The decision in the case of Rani Paliwal (supra) wasfollowed in Liberty Footwear Co. (supra) and on facts, it wasfound that in the said case also, there is no contention placedbefore the Court as to whether the interest income had directnexus with the business activity of the assessee. 27.In Rane Engine Valves Ltd. (supra), the Court whileconsidering as to whether the deposits made by the assessee withthe banks had an immediate nexus with the business of theassessee, found that the facts were not placed before the Courtand therefore, opined that the matter requires to be re-adjudicated afresh for which purpose, the matter was remanded tothe Assessing Officer to take a fresh look into the matter. 28.As pointed out by us earlier, the facts of the case arevividly clear and the Fixed Deposits have been created by thebank themselves by carving out a portion of the export saleproceeds on realisation and retaining them as Fixed Deposits inthe name of the assessee to be retained by the bank asadditional security for the loan availed by the assessee fortheir export business. 29.As mentioned earlier, the conversion of a portion of thesale proceeds as Fixed Deposits was done by the bank themselvesand not on the volition of the assessee. Therefore, we arefully convinced that the transaction was connected and closelylinked with the assessee's business activity. 30.Thus, we hold that the Tribunal erred in dismissing theassessee's appeal. 31.For the above reasons, the appeal filed by the assesseeis allowed and the substantial question of law is answered infavour of the assessee. No costs. Sd/- Assistant Registrar(CS VIII)//True Copy// Sub Assistant Registrar abr To 1. The Assistant Commissioner of Income-tax, Circle-I(i/c), Madurai.2. The Commissioner of Income-tax (Appeals)-I, Madurai.3. The Income-tax Appellate Tribunal Bench 'B', Chennai. +1cc to Mr.R.Srinivasan, Advocate, S.R.No.62822+1cc to Mr.M.Swaminathan, Advocate, S.R.No.62676 MP(CO)CS/17/09/2019 Tax Case (Appeal) No.2079 of 2008