M/S.procon Systems Pvt. Ltd v. The Income-Tax Officer, Company Ward V(1),Chennai-600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.233 of 2007 M/s.Procon Systems Pvt. Ltd.,77, Chamiers Road, R.A.Puram,Chennai-600 028. ..Appellant/Respondent Vs The Income-tax Officer, Company Ward V(1),Chennai-600 034. ..Respondent/Appellant Appeal under Section 260A of the Income-tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Bench 'B', Chennai in I.T.A.No.1546/Mds/2005 dated 28.09.2006 for the assessment year 2001-02 agaistthe order of the Commissioner of Income Tax (Ap[peals)-V, Chennai inITA.No.212/2004-05 dated 3.3.2005 for the assessment year 2001-02 againstthe order of the Income Tax, Officer Company Ward (1) Chennai-34 dated23/3/04 PANO/GIR.No. AABCP 2896H. For Appellant :Mr.V.S.Jayakumar JUDGMENT This appeal is filed under Section 260A of the Income Tax Act, 1961by the assessee, against the order of the Income Tax Appellate Tribunal,Bench 'B', Chennai in I.T.A. No.1546/Mds/2005 dated 28.09.2006 raising thefollowing substantial question of law:- Whether the Tribunal was right in holding that theinterest payment is not allowable under Sec.57 of theIncome-tax Act?" https://hcservices.ecourts.gov.in/hcservices/ 2.The facts leading to the above substantial question of law areas under: The assessee is a Private Limited Company and is engaged in themanufacture and export of Computer Software relating to travellingindustries. The relevant assessment year is 2001-2002 and thecorresponding accounting year ended on 31.03.2001. The assessee filedReturn of income on 31.10.2001 declaring "Nil" income. The Return wasprocessed under Section 143(1) of the Income-tax Act ("Act" in short).Later, the case was selected for scrutiny and also the assessment wasreopened under Section 147 of the Act. The assessment was completed underSection 143(3) of the Act determining the total income at Rs.7,35,210/-.While completing the assessment, the Assessing Officer rejected theassessee's claim that interest paid has direct relation with the interestreceived and hence the expenditure has to be allowed as deduction from theinterest income. The Assessing Officer also rejected the method ofcomputation of income. Aggrieved by the order, the assessee filed anappeal to the Commissioner of Income-tax (Appeals). The C.I.T.(A) allowedthe appeal. Aggrieved, the Revenue filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal allowed theRevenue's appeal and confirmed the order of the Assessing Officer. Hencethe present tax case is filed by the assessee. 3.Learned counsel appearing for the assessee submitted that theassessee has proved the nexus of the funds borrowed and invested in thebank account and as per the principle of real income theory, the netincome alone should be taxable. Further the counsel argued that in view ofthe real income theory, the expenditure to earn income from other sourcesshould have been allowed. 4.Heard the counsel. The assessee has admitted income in theProfit and Loss Account as under:-Sales : Rs.1,33,81,157Other income : Rs. 16,82,777 The assessee claimed the entire income as exempt under Section 10B of theAct. The details regarding the other income of Rs.16,82,777/- are asfollows:- (a) Exchange Fluctuation Gains : Rs.9,47,568/-(b) Interest on Deposits : Rs.7,35,209/- 3.Learned counsel appearing for the assessee submitted that theassessee has proved the nexus of the funds borrowed and invested in thebank account and as per the principle of real income theory, the netincome alone should be taxable. Further the counsel argued that in view ofthe real income theory, the expenditure to earn income from other sourcesshould have been allowed. 4.Heard the counsel. The assessee has admitted income in theProfit and Loss Account as under:-Sales : Rs.1,33,81,157Other income : Rs. 16,82,777 The assessee claimed the entire income as exempt under Section 10B of theAct. The details regarding the other income of Rs.16,82,777/- are asfollows:- (a) Exchange Fluctuation Gains : Rs.9,47,568/-(b) Interest on Deposits : Rs.7,35,209/- The Assessing Officer held that the interest on bank deposit does notqualify for exemption under Section 10B of the Act and hence proposed toassess the same as income under the head "Other Sources". The assesseehad obtained a loan of Rs.1,03,12,750/- from Industrialisation Fund forDeveloping Countries, Denmark on 27.08.1999 and on 14.03.2000. As theborrowed funds were not immediately required for business, they wereimmediately invested in the bank deposits on 27.08.1999 and 16.03.2000,respectively. The assessee had incurred expenditure of Rs.7,63,135/- https://hcservices.ecourts.gov.in/hcservices/ representing the interest on the above loans and hence the same should bededucted from the interest received from the bank deposits at the averagerate. The working of the same are as under:- Profit on finance activities Average balance of bank FD x Profit margin = 82,27,267 x 1.31 = 1,07,777On the above basis, the assessee contended that only Rs.1,07,777/-computed as above, should be assessed. Further it is contended by theassessee that the interest paid has direct relation with the interestreceived and hence the expenditure has to be allowed as deduction frominterest income. It is not in dispute that the assessee had admitted thatthe expenditure on account of interest has already been debited to Profitand Loss Account. Hence there is no separate deduction possible. When theassessee has already debited the expenditure in the Profit and LossAccount, it is not proper for the assessee to claim a separate deduction.The reasons given by the Tribunal are based on valid materials andevidence and it is not proper for the assessee to claim once again theinterest income under "income from other sources", which has already beendebited to Profit and Loss Account. 5.Under these circumstances, we are of the view that the orderpassed by the Tribunal is in accordance with law and the same does notrequire interference. Hence, no substantial question of law arises forconsideration of this Court and accordingly, the tax case is dismissed.No costs. km Sd/ Asst. Registrar /true copy/ Sub Asst.Registrar To 1. The Assistant Registrar, Income-tax Appellate Tribunal, Bench "B", Rajaji Bhavan, Besant Nagar, Chennai. Income-tax Appellate Tribunal, Bench "B", Rajaji Bhavan, Besant Nagar, Chennai. 2. The Secretary, Central Board of Direct Taxes, New Delhi. Central Board of Direct Taxes, New Delhi. 3. The Commissioner of Income-tax (Appeals)-V, Chennai-600 034. Chennai-600 034. 4. The Income-tax Officer, Company Ward-V(1), Chennai-34. + One cc to Mr. V.S. Jayakumar Advocate sR 32084NSM (co)sg 27/6/07 T.C.(A) No.233 of 2007 05.06.2007