M/s. Five Star Diamonds, v. CIT(A)-I, Pune, Pune

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B PUNE BEFORE SHRI I.C. SUDHIR JUDICIAL MEMBER AND SHRI G.S. PANNU ACCOUNTANT MEMBER ITA NO 1058/PN/06 (ASSTT. YEAR 2003-04) M/S FIVE STAR DIAMONDS NAVRATNA BUILDING BENAMA HALL LANE .. APP ELLANT DR D.D. SETH MARG OPERA HOUSE MUMBAI PAN NO AAAFF1487G VS. DY. COMMISSIONER OF INCOME-TAX CEN. CIR.2(3) PUNE .. RESPONDE NT APPELLANT BY :SHRI V.L.JAIN RESPONDENT BY :SHRI HEMANT KUMAR LEUVA ORDER PER G S PANNU A.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I PUNE DATED 8.9.2006 WHICH IN TURN HAS ARISEN FROM AN ORDER DATED 28.3.2006 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961 (I N SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2003-04. 2. THE RELEVANT FACTS ARE THAT THE ASSESSEE DERIVE S INCOME FROM THE BUSINESS OF MANUFACTURE TRADER EXPORTER IN DIAMON DS AND GOLD JEWELLERY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSING OFFICER VERIFIED THE EXTRACT OF BANK INTEREST ACCOUNT AND NOTICED TH AT THE ASSESSEE HAD PAID INTEREST OF RS 6 87 198/- TO THE BANK AND HAD ALSO RECEIVED INTEREST OF RS 1 62 388/- ON SHORT-TERM DEPOSITS KEPT WITH THE BAN K AND THE NET AMOUNT OF RS 5 24 810/- HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. ON BEING ASKED AS TO WHY THE INTEREST ON FIXED DEPOSIT KEPT FOR SH ORT PERIOD SHOULD NOT BE ITA NO 1058/N/06 M/S F IVE STAR DIAMONDS 2 TREATED AS INCOME FROM OTHER SOURCES ASSESSEE SU BMITTED THAT THE SHORT- TERM DEPOSITS WERE KEPT DURING THE YEAR OUT OF THE BUSINESS FUNDS NOT IMMEDIATELY REQUIRED FOR THE PURPOSE OF BUSINESS AN D IT CONSTITUTED A TRADING ASSET OR CIRCULATING CAPITAL AND NOT THE INVESTMENT AS SUCH AND THEREFORE INTEREST RECEIVED ON THE SAME IS BUSINESS INCOME. T HE ASSESSING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE H ELD THAT INTEREST INCOME EARNED OUT OF INVESTMENT OF SURPLUS FUNDS IS TO BE TAXED AS INCOME FROM OTHER SOURCES AND NOT BUSINESS INCOME. THE ASSESSI NG OFFICER FURTHER OBSERVED THAT THE EXPENDITURE IN THE SHAPE OF INTER EST IS TOTALLY UNRELATED TO THE INTEREST INCOME AND NETTING OFF WAS NOT POSSIBL E. AS PER THE ASSESSING OFFICER THE EFFECT OF NETTING IS THAT INTEREST INC OME EARNED TO THE EXTENT OF INTEREST DEBITED WOULD BE INCLUDED IN PROFITS DERI VED FROM THE BUSINESS OF EXPORTS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT WHICH IS NOT IN THE SCHEME OF THE ACT. THE ASSESSING OFFICER CONCLUDED THAT INTEREST EARNED FROM SHORT-TERM DEPO SITS IS TO BE ASSESSED AS INCOME FROM OTHER SOURCES AND NOT BUSINESS INCOM E AS CLAIMED BY THE ASSESSEE AND ACCORDINGLY AN AMOUNT OF RS 1 62 388 /- WAS TREATED AS INCOME FROM OTHER SOURCES AND THE INCOME FROM BUSIN ESS WAS REDUCED BY THE SAME AMOUNT AND DEDUCTION UNDER SECTION 80HHC M ODIFIED ACCORDINGLY. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS). BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) THE ASSESSEE REITERATED ITS SUBMISSIONS AS WERE MAD E BEFORE THE ASSESSING OFFICER AS ALSO RELIED ON VARIOUS JUDGEMENTS. THE C OMMISSIONER OF INCOME- TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN DETAIL HELD THAT MOST OF THE CASE LAWS RELIED UPON BY THE ASSESSEE WERE DISTINGUISHABLE ON FACTS. HE OBSERVED THAT THE EFFE CT OF NETTING IS THAT INTEREST INCOME EARNED TO THE EXTENT OF INTEREST DEBITED IS INCLUDED IN THE PROFITS DERIVED FROM THE BUSINESS OF EXPORTS FOR THE PURPOS E OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. ACCORDING TO THE COMMISSIONER ITA NO 1058/N/06 M/S F IVE STAR DIAMONDS 3 OF INCOME-TAX (APPEALS) THIS IS CLEARLY NOT IN THE SCHEME OF THE ACT AND THEREFORE NOT PERMISSIBLE. AFTER REFERRING TO SECT ION 57(III) OF THE ACT THE COMMISSIONER OF INCOME-TAX (APPEALS) OBSERVED THAT FROM THE FACTS OF THE ASSESSEES CASE IT WAS EVIDENT THAT THE EXPENDITURE IN THE SHAPE OF INTEREST INCURRED WAS TOTALLY UNRELATED TO INTEREST INCOME A ND THE NETTING OFF THEREFORE WAS NOT POSSIBLE. AS TO THE MEANING OF T HE WORD DERIVED FROM THE COMMISSIONER OF INCOME-TAX (APPEALS) RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CAMBAY ELECTRI C SUPPLY INDUSTRIAL CO. LTD; 113 ITR 84 AND OBSERVED THAT FROM THE DISCUSS ION OF THE MEANING OF THE WORD ATTRIBUTABLE TO WITH REFERENCE TO THE EXPRES SION DERIVED FROM IT COULD BE SEEN THAT THE MEANING OF THE EXPRESSION DERIVED FROM AS USED IN SECTION 80HHC MUST BE UNDERSTOOD AS PROFIT DIRECTLY ARISING FROM THE EXPORT OF GOODS AND NOT INCIDENTAL TO THE EXPORT. THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTIO N UNDER SECTION 80HHC IN RESPECT OF THE INTEREST INCOME IN QUESTION. BEING A GGRIEVED WITH THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ASSESSEE PREFERRED AN APPEAL BEFORE THE INCOME-TAX APPELLATE TRIBUNAL ON THE FOL LOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LD CIT(A) HAS ERRED BOTH ON FACTS AND AS WELL AS IN LAW IN NOT SUSTAIN ING THE ADDITION OF RS 1 62 388/- AS INCOME FROM OTHER SOURCES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD CIT(A) HAS ERRED IN TREATING THE INTEREST RECEIVED BY THE APPELLANT FR OM BANK DEPOSIT AS INCOME FROM OTHER SOURCES WITHOUT APPRECIATING THE FACTS THAT THESE FIXED DEPOSITS ARE KEPT OUT OF BUSINESS COMPULSION AND NECESSITY FOR AVAILING THE BANK FINANCE FOR CONDUCTING THE EXPORT BUSINESS EFFICIE NTLY. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD CIT(A) HAS ERRED IN REJECTING THE CLAIM OF THE APPELLANT REGARDING THE NETTING OFF OF INTEREST RECEIVED AND INTEREST PAID BY THE APPELLANT ONLY ON THE GROUND THAT EFFECT OF NETTING WILL RESULT IN INCREASING THE DEDUCTION U/S 80HHC TO THE APPELLANT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD CIT(A) HAS ERRED IN NOT SUSTAINING THE DEDUCTION U/S 80HHC TO THE INTER EST ON FIXED DEPOSIT RECEIVED BY THE APPELLANT. 4. THE APPEAL OF THE ASSESSEE WAS INITIALLY DISPOSE D OF BY THE TRIBUNAL VIDE ITS ORDER DATED 30.5.2008. SUBSEQUENTLY THE T RIBUNAL VIDE ITS ORDER IN M.A NO 8/PN/09 DATED 17.7.2009 ON AN APPLICATION B Y THE ASSESSEE HELD THAT THE ORDER OF THE TRIBUNAL DATED 30.5.2008 SUFF ERED FROM A MISTAKE ITA NO 1058/N/06 M/S F IVE STAR DIAMONDS 4 APPARENT FROM RECORD WITHIN THE MEANING OF SECTION 254(2) OF THE ACT WHEREBY CERTAIN GROUNDS RAISED BY THE ASSESSEE WERE NOT DISPOSED OF BY THE TRIBUNAL. IN ITS ORDER DATED 30.5.2008 THE TRIBUNA L DID NOT DISPOSE OF THE MAIN PLEA OF THE ASSESSEE REFLECTED IN GROUND NOS. 1 2 AND 4 REPRODUCED ABOVE WHILE ONLY THE ALTERNATIVE PLEA RELATING TO N ETTING OF INTEREST WAS DISPOSED OFF. IN THIS BACKGROUND WE HAVE HEARD THE RIVAL PARTIES. 5. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TRE ATING THE INTEREST INCOME EARNED BY THE ASSESSEE ON SHORT-TERM DEPOSITS AS IN COME FROM OTHER SOURCES. ACCORDING TO THE LEARNED COUNSEL THE SAME QUALIFIES TO BE ASSESSED AS BUSINESS INCOME SINCE THE SHORT-TERM DEPOSITS WERE MADE FOR OBTAINING LETTER OF CREDIT AND OTHER FACILITIES FRO M THE BANK. THE BANK INSISTED FOR SHORT-TERM DEPOSITS IN LIEU OF FACILITIES AVAIL ED BY THE ASSESSEE. 6. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPR ESENTATIVE CONTENDED THAT THE LOWER AUTHORITIES MADE NO MISTAK E IN ASSESSING THE INCOME FROM SHORT-TERM DEPOSITS AS INCOME FROM OTHE R SOURCES AND ALSO IN DENYING THE CLAIM OF DEDUCTION UNDER SECTION 80HHC OF THE ACT IN RESPECT TO SUCH INCOME. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. IN THIS CASE THE ASSESSING OFFICER HAD TREATED THE INTEREST INCOME E ARNED BY THE ASSESSEE AS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S AS AGAINST BUSINESS INCOME TREATED BY THE ASSESSEE. SECONDLY AS PER T HE ASSESSING OFFICER THE SAID INTEREST INCOME AMOUNTING TO RS 1 62 388/- WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE TWO I SSUES WHICH AROSE BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) WER E REGARDING THE CLAIM OF THE ASSESSEE THAT INTEREST INCOME WAS TO BE TREA TED AS INCOME FROM BUSINESS AND CONSEQUENTIAL RELIEF UNDER SECTION 80H HC; AND SECONDLY WHETHER NETTING OF INTEREST RECEIVED AGAINST INTERE ST PAID WAS TO BE ALLOWED. THE COMMISSIONER OF INCOME-TAX (APPEALS) DISMISSED THE APPEAL OF THE ITA NO 1058/N/06 M/S F IVE STAR DIAMONDS 5 ASSESSEE AGAINST WHICH ASSESSEE WAS IN APPEAL BEFOR E THE TRIBUNAL. THE TRIBUNAL HELD THAT NETTING OF INTEREST RECEIVED AGA INST INTEREST PAID WAS NOT PERMISSIBLE HAVING REGARD TO THE FACTS AND CIRCUMST ANCES OF THE CASE. HOWEVER THE ISSUES PERTAINING TO THE ASSESSABILITY OF INTEREST INCOME UNDER THE HEAD OTHER SOURCES OR BUSINESS INCOME AND R EGARDING THE CLAIM OF DEDUCTION UNDER SECTION 80HHC ON SUCH INTEREST INCO ME WAS NOT ADJUDICATED. IN THIS BACKGROUND THE PRESENT PROCE EDINGS HAVE BEEN LISTED TO DISPOSE OF THE ISSUES REMAINING IN THE APPEAL OF TH E ASSESSEE FOLLOWING THE ORDER OF THE TRIBUNAL IN M.A NO 8/PN/09 DATED 17.7. 2009 (SUPRA). 8. IN SO FAR AS THE MATTER RELATING TO ASSESSABILIT Y OF INTEREST INCOME IS CONCERNED THE LEARNED COUNSEL FOR THE ASSESSEE FAI RLY POINTED OUT THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS NOT ADJUDI CATED AS TO WHETHER THE INTEREST INCOME WAS ASSESSABLE AS BUSINESS INCOME OR NOT. IN PARAGRAPH 4.6 OF THE IMPUGNED ORDER THE COMMISSIONER OF INCOME-T AX (APPEALS) HELD THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION UNDER SE CTION 80HHC OF THE ACT IN RESPECT OF INTEREST INCOME BECAUSE THE SAME COUL D NOT BE SAID TO HAVE BEEN DERIVED FROM EXPORT BUSINESS. HOWEVER WHETH ER INCOME WAS TO BE ASSESSED UNDER THE HEAD OTHER SOURCES OR BUSINESS INCOME HAS NOT BEEN ADJUDICATED WHICH IN OUR VIEW IS A NECESSARY INGR EDIENT TO EXAMINE THE WORKING OF THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. IT BECOMES IMPORTANT TO DECIDE SO BECAUSE EVEN IF AN INCOME C AN BE SAID TO BE NOT DERIVED FROM EXPORT BUT IT MAY STILL BE ASSESSAB LE AS BUSINESS INCOME. IN SUCH A SITUATION SUCH INCOME MAY REMAIN A PART OF THE PROFITS OF THE BUSINESS AND SUBJECTED TO EXPLANATION (BAA) OF SEC TION 80HHC OF THE ACT. FOR THIS PURPOSE WE DEEM IT FIT AND PROPER TO REST ORE THE MATTER BACK TO THE FILE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) W HO SHALL ADJUDICATE AS TO WHETHER INTEREST INCOME IS LIABLE TO BE ASSESSED AS BUSINESS INCOME OR AS INCOME FROM OTHER SOURCES. THEREUPON THE COMMIS SIONER OF INCOME-TAX (APPEALS) SHALL EXAMINE THE WORKING OF THE ASSESSEE S CLAIM FOR DEDUCTION ITA NO 1058/N/06 M/S F IVE STAR DIAMONDS 6 UNDER SECTION 80HHC OF THE ACT WITH RESPECT TO SUCH INCOME IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION THE ISSUE REGARDING THE NETTING OF INTEREST RECEIVED AGAINST INTEREST EXPENDITURE HAS ALREADY B EEN ADJUDICATED AGAINST THE ASSESSEE BY THE TRIBUNAL VIDE ITS ORDER DATED 3 0.5.2008 (SUPRA) AND THE SAME IS NOT OPEN FOR RE-EXAMINATION AT THIS STAGE. THEREFORE FOR THE LIMITED PURPOSE AS MENTIONED ABOVE THE MATTER IS RESTORED BACK TO THE FILE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) WHO SHALL PAS S AN ORDER AFRESH IN ACCORDANCE WITH LAW AFTER AFFORDING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 8. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 23RD DAY OF FE BRUARY 2011. SD/- SD/- (I.C. SUDHIR) (G.S. PANN U) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED:23RD FEBRUARY 2011 COPY TO:- 1) M/S FIVE STAR DIAMONDS MUMBAI 2) DCIT CEN. CIR. 2(3) PUNE 3) THE CIT-(A)-I PUNE 4) THE CIT-1 PUNE 4) THE DEPARTMENTAL REPRESENTATIVE B BENCH ITAT PUNE BY ORDER TRUE COPY ASST. REGISTRAR I.T.A.T. PUNE B