The DCIT, Circle 5, Ahmedabad v. Prabhudas Kishordas Tobacco Products Ltd, Ahmedabad

ITA 1952/AHD/2008 | 2005-2006
Pronouncement Date: 30-09-2010 | Result: Partly Allowed

Appeal Details

RSA Number 195220514 RSA 2008
Assessee PAN AABCP1495Q
Bench Ahmedabad
Appeal Number ITA 1952/AHD/2008
Duration Of Justice 2 year(s) 4 month(s) 3 day(s)
Appellant The DCIT, Circle 5, Ahmedabad
Respondent Prabhudas Kishordas Tobacco Products Ltd, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 30-09-2010
Date Of Final Hearing 29-09-2010
Next Hearing Date 29-09-2010
Assessment Year 2005-2006
Appeal Filed On 27-05-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MUKUL SHRAWAT JM & SHRI A N PAHUJA AM ITA NO.1952/AHD/2008 (ASSESSMENT YEAR:-2005-06) DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-5 AHMEDABAD V/S PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT. LTD. 102 POPULAR HOUSE ASHRAM ROAD AHMEDABAD [PAN: AABCP 1495 Q] [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI K M MAHESH DR ASSESSEE BY:- SHRI BANDISH SOPARKAR AR O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATE D 24-03-2008 OF THE LD. CIT(APPEALS)-XI AHMEDABAD RAISES THE FOLLOWING GROUNDS:- 1. THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHMEDABA D HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE O F RS.27 74 905/- ON ACCOUNT OF DISALLOWANCE OF EXPENSES U/S 14A. 2. THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE O FRS.2 28 94 900/- ON ACCOUNT OF DISALLOWANCE U/S 40A(2)(B). 3. THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MA DE OF RS.4 42 620/- ON ACCOUNT OF DISALLOWANCE U/S 80IA. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHMEDABAD OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 5. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHMEDABAD MAY BE SET ASIDE AND T HAT OF THE ASSESSING OFFICER BE RESTORED. 2 ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL FAC TS IN BRIEF AS PER RELEVANT ORDERS ARE THAT THE RETURN DECLARING I NCOME OF RS.19 94 60 380/- FILED ON 24-10-2005 BY THE ASSESS EE ITA NO.1952/AHD/2008 2 MANUFACTURING TOBACCO PRODUCTS WAS TAKEN UP FOR SC RUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS THE ACT] ON 06-09-200 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFF ICER[AO IN SHORT] NOTICED THAT THE ASSESSEE MADE INVESTMENT I N THE FOLLOWING EQUITY SHARES AND UNITS OF UTI ETC.: (IN RS.) (I) EQUITY SHARES OF SYNDICATE BANK 1518 564 (II) EQUITY SHARES OF UCO BANK 4800 (III) UNITS OF UTI 64 1976000 (IV) UNITS OF UTI MIP 99 500000 0 --------------- 18499364 2.1 SINCE DIVIDEND INCOME FROM THE AFORESAID IN VESTMENTS WAS EXEMPT U/S 10(34) OF THE ACT WHILE THE ASSESSEE PA ID INTEREST ON BORROWINGS TO THE TUNE OF RS.13.95 CRORES THE AO W AS OF THE OPINION THAT THE ASSESSEE UTILIZED ITS PART OF INTEREST BE ARING FUNDS IN INVESTMENT OF THE AFORESAID ASSETS WHICH YIELDED T AX FREE RETURNS. TO A QUERY BY THE AO THE ASSESSEE EXPLAINED THAT T HE COMPANY DID NOT INVEST ANY AMOUNT OUT OF BORROWED FUNDS IN T HE EARLIER YEARS NOR ANY SUCH INVESTMENT WAS MADE DURING THE YEAR. SINCE THE COMP ANY OWNED NON-INTEREST BEARING FUNDS AMOUNTING TO RS.78.96 CRORES WHILE I NVESTMENTS OF ONLY RS.1.85 CRORES YIELDED EXEMPT INCOME NO AMOUNT OF EXPEND ITURE WAS INCURRED IN RELATION TO SUCH EXEMPT INCOME AND THEREFORE NO D ISALLOWANCE U/S 14A WAS CALLED FOR THE ASSESSEE PLEADED. INTER ALIA THE A SSESSEE RELIED UPON DECISIONS IN DHANLAXMI BANK LTD. V/S. ACIT IN ITA NO. 945 & 990 OF 2004 12 SOT 625 CIT V/S. PREM HEAVY ENGINEERING WORKS 285 ITR 554 (ALL. ) AND WIMCO SEEDING LTD. V/S. DCIT (ASST.) 293 ITR 216 (ITAT). HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE RE WAS NOTHING TO SUGGEST THAT INTEREST FREE UNSECURED LOANS WERE UTILIZED FOR ACQUIRING THE EQUITY SHARES NOR SUPPORTING DETAILS/PARTICULARS WE RE SUBMITTED. AS REGARDS PLEA THAT INTEREST FREE BEARING FUNDS WERE USED FOR THE PURPOSE OF MAKING SUCH INVESTMENT AND THEIR OWN FUNDS WERE MORE THAN THE A MOUNT INVESTED THE AO ITA NO.1952/AHD/2008 3 OBSERVED THAT THE ASSESSEE DID NOT SUBSTANTIATE T HIS CLAIM THE ASSESSEE HAVING NOT FURNISHED THE DETAILS OF INTEREST BEARING FUN DS AND THEIR UTILIZATION ACCORDINGLY RELYING UPON DECISIONS REPORTED IN CI T VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1(P&H) AND CIT VS. H.R SUGAR FACTOR Y PVT. LTD. 187 ITR 363(ALL) AND DISTINGUISHING THE DECISIONS RELIED UPON BY THE ASSESSEE THE AO DISALLOWED INTEREST OF RS.2774905 THE ASSESSEE HAVING FAIL ED TO ESTABLISH THEIR CLAIM OF UTILIZATION OF INTEREST FREE FUNDS OF RS.73.96 CRO RES FOR MAKING INVESTMENT IN SHARES TO THE EXTENT OF RS.18499364/- . 3. ON APPEAL HE LD. CIT(A) DELETED THE DISALLOWANC E IN THE FOLLOWING TERMS. 4.2 IT IS SEEN THAT THE SIMILAR ISSUE WAS INVOLVED IN THE APPELLANT'S OWN CASE FOR IMMEDIATE PRECEDING ASSESSMENT YEAR I.E. A . Y. 2004-05. THE SAME HAS ALREADY BEEN DECIDED BY ME IN FAVOUR OF TH E APPELLANT VIDE MY ORDER NO. CLT(A)-XI/284/2006-07 DATED 13-03-2007. T HEREFORE HAVING CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE; IN VIEW OF DETAIL FINDINGS GIVEN BY ME IN THE ABOVE ORDER I AM OF TH E VIEW THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING DISALL OWANCE ON THIS COUNT. HENCE THE AO IS DIRECTED TO DELETE THE ADDITION MA DE BY HIM. THUS THIS GROUND OF APPEAL IS ALLOWED. 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE FINDINGS OF THE AO WHILE THE LD. AR ON BEHALF OF TH E ASSESSEE STATED THAT A SIMILAR DISALLOWANCE MADE IN THE PRECEDING YEAR WAS DELETED BY THE LD. CIT(A) AND THE REVENUE DID NOT PREFER AN Y APPEAL AGAINST THE ORDER OF THE LD. CIT(A). ACCORDINGLY RELYING U PON THE DECISIONS IN CIT VS. JK CHARITABLE TRUST 220 CTR 105 (SC) RAD HASOAMI SATSANG VS. CIT (1992) 193 ITR 321 (SC) AND CIT VS. SRIDEV ENTERPRISES 192 ITR 165(KAR) THE LD. AR SUPPORTED THE FINDINGS OF THE LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. AT THE OUTSET WE FIND THAT THOUGH THE L D. CIT(A) DELETED THE DISALLOWANCE ON THE GROUND THAT A SIMILAR DI SALLOWANCE WAS ITA NO.1952/AHD/2008 4 DELETED BY HIM IN THE PRECEDING ASSESSMENT YEAR 200 4-05 AND THE LD. AR SUPPORTED THIS FINDING OF THE LD. CIT(A) FA CTS AS REVEALED FROM THE ORDER OF THE LD. CIT(A) FOR THE AY 2004-05 ARE OTHERWISE. IN THE PRECEDING YEAR THE LD. CIT(A) DEALT WITH THE I SSUE IN THE FOLLOWING TERMS: 2.1. DURING THE COURSE OF APPEAL PROCEEDINGS OBJE CTING TO THE AO'S ACTION THE A. R. HAS FILED WRITTEN SUBMISSION S. THE SAME IS REPRODUCED HEREUNDER FOR CONVENIENCE SAKE:- 'THE AO ERRED IN DISALLOWING EXPENSES OF RS.1 23 98 0/- TOWARDS EARNING OF EXEMPTED INCOME ON ADHOC BASIS. AO HAS DISALLOWED 0.50% OF SUNDRY EXPENSES (RS.16 63 074/- ) AND BANK COMMISSION (RS.8 16 536/-) ON PICK AND CHOOSE BASIS. AO HAS NOT SCRUTINIZED THE NATURE OF EXPENDITURE. S UNDRY EXPENSES (ANNEXURE-A) REVEAL THAT THERE IS NO RELAT IONSHIP BETWEEN EXEMPTED INCOME AND ANY OF SUCH EXPENSES. W ITH RESPECT TO BANK COMMISSION ALL THE EXPENSES ARE FOR DRAFT COMMISSION CHARGED BY THE VARIOUS BANK (ANNEXURE-B) . IT IS THE PRACTICE THAT THE DIVIDEND / INTEREST CHEQUES A RE AT PAR FACILITY HENCE IT IS LIKE A LOCAL CLEARING CHEQUE A ND NO COLLECTION CHARGES ARE LEVIED BY THE BANK. THERE A RE THUS NO EXPENSES FOR COLLECTION OF EXEMPTED INCOME. THE AO HAS DISALLOWED THE EXPENSES ON ADHOC BASIS T O COVER EXPENSES LIKE SALARY OF EMPLOYEE FOR CHEQUE DEPOSIT ED IN BANKS CORRESPONDENCE WITH RESPECTIVE COMPANIES PO ST EXPENSES ETC. AS THE EMPLOYEES OF THE COMPANY ARE V ISITING THE BANK EVERY DAY FOR OTHER PURPOSES OTHER THAN FO R DEPOSIT OF CHEQUE OF DIVIDEND. NORMALLY DIVIDEND OF THE COMPAN Y COME ONLY ONCE IN A YEAR OR TWICE IN CASE OF INTERIM DIV IDEND. COMPANY HAS NOT TO INCUR ANY EXTRA COST FOR EARNING EXEMPTED INCOME AND ADHOC DISALLOWANCE SHOULD BE DELETED AS THERE ARE NO EXPENSES FOR REALIZATION OF DIVIDEND INCOME OR E XEMPT INCOME. 11.2. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS SUBMITTED BY THE A. R. THAT THE ACTION OF THE ASSES SING OFFICER IS NOT JUSTIFIED AND PLEADED TO DELETE THE ADDITION BY THE A. O. 2.2. THE SUBMISSIONS OF THE A. R. OF THE APPELLANT HAVE BEEN PERUSED. THE DETAILS PRODUCED BEFORE ME BY THE A. R . OF THE APPELLANT AND THE OBSERVATIONS OF THE ASSESSING OFF ICER IN THE ASSESSMENT HAVE ALSO BEEN EXAMINED. ITA NO.1952/AHD/2008 5 2.2.1. AFTER VERIFYING THE FACTS AND CIRCUMSTANCES OF THE CASE I AM OF THE VIEW THAT THE ARGUMENTS ADVANCED BY THE A. R. ARE ACCEPTABLE TO A LARGE EXTENT. HOWEVER AS CO ULD BE SEEN SOME EMPLOYEE OR THE OTHER HAS TO NECESSARILY SPEND SOME TIME TO LOOK AFTER THESE INVESTMENTS AND RECEIPTS O F INTEREST / DIVIDENDS. THEREFORE IT COULD BE REASONABLE TO ATT RIBUTE ONLY SOME LABOUR OF ONE EMPLOYEE IS ATTACHED FOR THIS WO RK. THEREFORE I AM OF THE OPINION THAT A DISALLOWANCE OF RS.36 000/- WHICH COULD BE PAYABLE TO A PART TIME E MPLOYEE WOULD MEET THE ENDS OF THE JUSTICE. ACCORDINGLY OUT OF DISALLOWANCE OF RS.1 23 980/- ONLY RS.36 000/- IS D ISALLOWED AND THE BALANCE IS DELETED. THUS THIS GROUND OF AP PEAL IS PARTLY ALLOWED. 5.1 IT IS EVIDENT THAT THE LD. CIT(A) HAD SUSTAIN ED THE DISALLOWANCE OF RS.36 000/- OUT OF RS.1 23 980/- MADE U/S 14A OF THE ACT IN THE PRECEDING ASSESSMENT YEAR. THEREFORE THE CONCLUSIO N DRAWN BY THE LD. CIT(A) IN THE YEAR UNDER CONSIDERATION BASED ON HIS OWN DECISION IN THE PRECEDING YEAR IS NOT CORRECT. A BARE PERUSAL OF THE IMPUGNED ORDER REVEALS THAT THE LD. CIT(A) DID NOT APPLY HIS MIND TO THE FACTS OF THE CASE. APPARENTLY THE LD. CIT(A) H AVE NOT PASSED A SPEAKING ORDER. WE ARE OF THE OPINION THAT THE APPLICATION O F MIND TO THE MATERIAL FACTS AND THE ARGUMENTS SHOULD MANIFEST ITSELF IN THE ORDER. SECTION 250(6) OF THE INCOME TAX ACT MANDATES THAT THE ORDER OF THE CIT(A) WHILE DISPOSING OF THE APPEAL SHALL BE IN WRITING AND SHALL STATE THE POINTS FOR DETERM INATION THE DECISION THEREON AND THE REASON FOR THE DECISION. AS IS APPARENT FROM T HE IMPUGNED ORDER IN OUR OPINION THE ORDER PASSED BY THE LD. CIT(A) IS CRYP TIC AND GROSSLY VIOLATIVE OF ONE OF THE FACETS OF THE RULES OF NATURAL JUSTICE NAME LY THAT EVERY JUDICIAL/QUASI- JUDICIAL BODY/AUTHORITY MUST PASS REASONED ORDER W HICH SHOULD REFLECT APPLICATION OF MIND BY THE CONCERNED AUTHORITY TO THE ISSUES/PO INTS RAISED BEFORE IT. THE REQUIREMENT OF RECORDING OF REASONS AND COMMUNICATI ON THEREOF HAS BEEN READ AS AN INTEGRAL PART OF THE CONCEPT OF FAIR PROCEDUR E AND SAFEGUARD TO ENSURE OBSERVANCE OF THE RULE OF LAW. IT INTRODUCES CLARIT Y CHECKS THE INTRODUCTION OF EXTRANEOUS OR IRRELEVANT CONSIDERATIONS AND MINIMIZ ES ARBITRARINESS IN THE DECISION-MAKING PROCESS. WE MAY POINT OUT THAT A D ECISION DOES NOT MERELY ITA NO.1952/AHD/2008 6 MEAN THE CONCLUSION. IT EMBRACES WITHIN ITS FOLD THE REASONS FORMING BASIS FOR THE CONCLUSION. 5.2 WE FURTHER FIND THAT RECENTLY HONBLE BOMBA Y HIGH COURT IN THEIR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. IN THE ITA NO. 626/2010 WHILE ADJUDICATING A SIMILAR I SSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT AND RULE 8D OF TH E IT RULES 1962 CONCLUDED THAT RULE 8D INSERTED W.E.F 24.3.2008 CANNOT BE R EGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATIN G EXPENDITURE RELATABLE TO TAX- FREE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE ASSESSMENT YEARS WHERE RULE 8D DOES NOT APPLY THE AO WILL HAVE TO DETERMI NE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAV ING REGARD TO ALL FACTS AND CIRCUMSTANCES. 5.3 HONBLE SUPREME COURT IN THEIR DECISI ON DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. INTER ALIA OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMA TE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOM E. HONBLE APEX COURT OBSERVED IN THE CONTEXT OF PROVISIONS SEC.14A OF T HE ACT IN THE FOLLOWING TERMS: 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFF ECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTIO N IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCO ME (SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS SECTION 14 A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PA RTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A THE EXPENDITURE INCURRE D IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. TH E MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AN D AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CE RTAIN PROVISIONS OF THE ACT. IN THE PAST THERE HAVE BEEN CASES IN WHICH DEDUCTI ON HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY ITA NO.1952/AHD/2008 7 DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX T HE NET INCOME I.E. GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEM PTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECT ION 14A THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER TH IS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UN DER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS 'IN RELATIO N TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME THEN THE RELATED EXPENDITURE IS OU TSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER SECTION 14 S PECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEA BLE AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEA BLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF T HE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOM E IS NOT A PART OF THE TOTAL INCOME THE EXPENDITURE/DEDUCTION THOUGH OF THE NAT URE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTA L INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT O F EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS IN PRINCIPLE BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59 IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXP ENDITURE ON RENT TAXES SALARIES INTEREST ETC. IN RESPECT OF WHICH ALLOWA NCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) 5.4 WE ALSO FIND THAT HONBLE KERALA HIGH COURT IN THEIR DECISION DATED 17.6.2010 IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN IN ITA.NO. 1784 OF 2009 HELD N THE CONTEXT OF PROV ISIONS OF SEC.14A OF THE ACT AS UNDER: 4. ON FACTS WE FIND THAT THE INTEREST PAID BY THE ASSESSEE DURING THE PREVIOUS YEAR FOR THE FUNDS BORROWED FOR ACQUISITION OF SHAR ES IN THE COMPANY WAS AT THE RATE OF 24% P.A. AND THE TOTAL INTEREST PAID IN THE ACCOUNTING YEAR ALONE IS AS MUCH AS RS.17 44 310/-. IT IS ON RECORD THAT ASSESS EE HAD RECEIVED ONLY A DIVIDEND INCOME OF RS.3 LAKHS AND NO OTHER BENEFIT IS DERIVED FROM THE COMPANY FOR THE BUSINESS CARRIED ON BY IT. THE DISALLOWANCE PROHIBITED UNDER SECTION 14A IS EXPENDITURE INCURRED FOR EARNING ANY INCOME WHIC H DOES NOT CONSTITUTE TOTAL INCOME OF THE ASSESSEE. IN OTHER WORDS ANY EXPENDI TURE INCURRED FOR EARNING ANY INCOME WHICH IS NOT TAXABLE UNDER THE ACT IS NOT A N ALLOWABLE EXPENDITURE. DIVIDEND INCOME IS EXEMPT UNDER SECTION 10(33) OF T HE INCOME TAX ACT AND SO MUCH SO DIVIDEND EARNED BY THE ASSESSEE ON THE SHA RES ACQUIRED BY HER WITH BORROWED FUNDS DOES NOT CONSTITUTE TOTAL INCOME IN THE HANDS OF THE ASSESSEE. SO ITA NO.1952/AHD/2008 8 MUCH SO IN OUR VIEW DISALLOWANCE WAS RIGHTLY MADE BY THE ASSESSING OFFICER. IN FACT THE TRIBUNAL ITSELF HAS ESTIMATED DISALLOWANC E OF RS.2 LAKHS BY APPLYING SECTION 14A. WE DO NOT KNOW HOW THE TRIBUNAL CAN RE STRICT THE DISALLOWANCE TO RS.2 LAKHS AND ALLOW BALANCE ABOVE RS.15 LAKHS WHEN THE WHOLE BORROWED FUNDS WERE UTILISED BY THE ASSESSEE FOR PURCHASE OF SHARE S IN THE COMPANY. IN OUR VIEW THE REASONING GIVEN BY THE TRIBUNAL FOR DISALLOWANC E OF RS.2 LAKHS I.E. BY APPLYING SECTION 14A SQUARELY APPLIES FOR THE INTEREST PAID ON BORROWED FUNDS BECAUSE IT IS ON RECORD THAT THE ENTIRE FUNDS BORROWED WERE UT ILISED FOR ACQUISITION OF SHARES BY THE ASSESSEE IN THE COMPANY. IN FACT IN OUR VIE W ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT ON BORROWED FUNDS UTILISED FOR THE ACQUISITION OF SHARES ONLY IF SHAR ES ARE HELD AS STOCK IN TRADE WHICH ARISES ONLY IF THE ASSESSEE IS ENGAGED IN TRADING I N SHARES. SO FAR AS ACQUISITION OF SHARES IS IN THE FORM OF INVESTMENT AND THE ONLY BENEFIT ASSESSEE DERIVED IS DIVIDEND INCOME WHICH IS NOT ASSESSABLE UNDER THE A CT THE DISALLOWANCE UNDER SECTION 14A IS SQUARELY ATTRACTED AND THE ASSESSING OFFICER IN OUR VIEW RIGHTLY DISALLOWED THE CLAIM. AS ALREADY POINTED OUT THE C ALCUTTA HIGH COURT DECISION WHICH PERTAINS TO THE PERIOD PRIOR TO INTRODUCTION OF SECTION 14A HAS NO APPLICATION. THE DECISION OF THE SUPREME COURT ALSO DOES NOT APPLY BECAUSE IN THIS CASE APART FROM INVESTMENT IN SHARES OF THE CO MPANY THERE IS NOTHING TO INDICATE THAT THE ASSESSEE'S BUSINESS WAS FULLY LIN KED WITH THE BUSINESS OF THE LEASING COMPANY OR THAT ASSESSEE'S BUSINESS IS SOLE LY DEPENDENT ON THE BUSINESS OF THE LEASING COMPANY. IN FACT THE WHOLE TRANSACTION WAS A TOTAL FIASCO IN AS MUCH AS AS AGAINST RS.17 44 310/- PAID TOWAR DS INTEREST ON BORROWED FUNDS SERVICED AT THE RATE OF INTEREST OF 24% P.A. THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR WAS A MEAGRE SUM OF RS.3 LAKHS. THIS ONLY SHOWS THAT THE BUSINESS CARRIED ON BY THE LEAS ING COMPANY WAS NOT VERY SUBSTANTIAL TO JUSTIFY THE ASSESSEE'S INVESTMENT TH ROUGH BORROWED FUNDS. THEREFORE IN OUR VIEW THE PRINCIPLE OF COMMERCIAL EXPEDIENCY GONE INTO BY THE SUPREME COURT DOES NOT APPLY TO THE FACTS OF THIS C ASE. THEREFORE WE HOLD THAT THE TRIBUNAL IN PRINCIPLE RIGHTLY HELD THAT THE UTI LISATION OF BORROWED FUNDS FOR ACQUISITION OF SHARES WILL NOT ENTITLE THE ASSESSEE FOR CLAIMING DEDUCTION OF INTEREST PAID ON SUCH BORROWED FUNDS. HOWEVER WE H OLD THAT THE TRIBUNAL WAS NOT JUSTIFIED IN ALLOWING THE CLAIM IN EXCESS OF RS.2 L AKHS. FOR THE SAME REASONING APPLIED BY THE TRIBUNAL THE ASSESSEE IS NOT ENTITL ED TO DEDUCTION OF ANY AMOUNT TOWARDS INTEREST PAID ON FUNDS BORROWED BY WAY OF F IXED DEPOSITS TAKEN FOR ACQUISITION OF SHARES IN THE COMPANY WHICH HEL PED THE ASSESSEE ONLY TO EARN SOME DIVIDEND. 6. AS ALREADY POINTED OUT SINCE THE LD. CIT(A) HAV E NOT PASSED A SPEAKING ORDER IN THIS CASE NOR HE HAD THE BENEFIT OF THE AFORESAID DECISIONS WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE O RDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUES RAI SED IN THE GROUND NO.1 AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDICIA L PRONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. ITA NO.1952/AHD/2008 9 NEEDLESS TO SAY THAT WHILE REDECIDING THE ISSUE TH E LEARNED CIT(A) SHALL PASS A SPEAKING ORDER KEEPING IN MIND INTER ALIA THE MA NDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. WITH THESE OBSERVATIONS GROUND NO. 1 IS DISPOSED OF. 7. GROUND NO.2 IN THE APPEAL RELATES TO DISALLOWANC E OF RS.2 28 94 900/- U/S 40A(2)(B) OF THE ACT. THE AO NOTICED THAT THE ASSESSEE PAID INTEREST @ 18% TO ITS SHAREHOLDERS OR OTHER PERSONS COVERED U/S 40A(2)(B) OF THE ACT. SINCE THE RATE OF 18% PA WAS HIGHER THAN THE MARKET RATES THE AO ASKED THE ASS ESSEE TO JUSTIFY THE PAYMENT OF HIGHER RATE OF INTEREST TO ASSOCIATE PERSONS / CONCERNS. THE ASSESSEE VIDE LETTER DATED 10-12-2007 EXPLAINED THAT THEY HAD PAID INTEREST @18% PA TO THE SHAREHOLDERS /OTHER PERSONS INSTEAD OF @22% PA IN THE PRECEDING YEARS WHILE MAR KET RATE WAS MUCH MORE. RELYING UPON THE DECISIONS IN THE CASE O F VOLTEMP TRANSFORMERS P LTD. VS. CIT 129 ITR 105 &SA BUILDER S LTD. VS. CIT 288 ITR1(SC) THE ASSESSEE EXPLAINED THAT THE I NTEREST ON CLEAN OVERDRAFT ACCOUNTS (EQUIVALENT TO UNSECURED BORROWI NGS FROM SHAREHOLDERS) WAS 16.50% WITH MONTHLY REST IN THE F Y 2004-05 WHICH WORKS OUT TO 17.81% P.A. AS PER CERTIFICATE ISSUED BY BANK OF BARODA. SINCE THE INTEREST PAID TO THE SHAREHOLDERS WAS EXACTLY SAME AS THE COMMERCIAL RATE OF INTEREST CHARGED BY THE NATIONALIZED BANK THE ASSESSEE PLEADED THAT NO DISALLOWANCE SHO ULD BE MADE. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT SINCE THE ASSESSEE WAS HAVING FI XED DEPOSITS WITH BANK @ 4 TO 6% APPARENTLY THE ASSESSEE WAS HAV ING SURPLUS FUNDS; INSTEAD OF REPAYING THE LOANS/AND ADVANCES CARRYING HIGHER RATES OF INTEREST THE ASSESSEE PARKED ITS FUNDS W ITH THE BANKS CARRYING INTEREST AT LOWER RATES. IN THESE CIRCUMST ANCES WHILE RELYING UPON THE DECISION IN THE CASE OF MOFUSSIL W AREHOUSE & TRADING CO. LTD. 238 ITR 687(MAD) AND HIS OWN FINDI NGS IN THE PRECEDING ASSESSMENT YEARS THE AO RESTRICTED THE C LAIM OF INTEREST PAYMENT TO 15% PA AND DISALLOWED THE EXCESSIVE PAY MENT OF ITA NO.1952/AHD/2008 10 INTEREST @3%(18-15)PA RESULTING IN DISALLOWANCE OF RS.2 28 94 900/-. 8. ON APPEAL THE LEARNED CIT(A) FOLLOWING HIS OW N ORDER IN THE ASSESSEES OWN CASE FOR THE AY 2004-05 DELETED THE DISALLOWANCE. 9. THE REVENUE IS IN APPEAL BEFORE US AGAINST THE A FORESAID FINDINGS OF THE LEARNED CIT(A). BOTH THE PARTIES AG REED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY TH E DECISION DATED 02-07-2010 OF THE ITAT IN THE ASSESSEES OWN CASE F OR AY 2004-05 IN ITA NO.2121/AHD/2007 FOLLOWING THE DECISION DAT ED 30-04-2010 OF THE ITAT FOR THE AY 2002-03 AND 2003-04 IN ITA NOS.782 AND 2064/AHD/2006 . 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION OF THE ITAT FOR THE P RECEDING ASSESSMENT YEAR. WE FIND THAT THE ITAT WHILE ADJUDI CATING A SIMILAR CLAIM IN THE ASSESSEES OWN CASE IN THE AY 2004-05 FOLLOWED THE THE DECISION DATED 30-04-2010 OF THE ITAT FOR THE AY 2002-03 AND 2003-04 IN ITA NOS.782 AND 2064/AHD/2006 WHEREIN I T WAS CONCLUDED AS UNDER: 13. WE HAVE HEARD THE RIVAL CONTENTIONS AN D GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THESE L OANS WERE BORROWED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS IN EARLIER YEARS I.E. SINCE ASSESSMENT YEAR 1992-93. NO SUCH DISALLOWANCE HAS B EEN MADE IN THE PAST. THIS FACT IS NOT CONTROVERTED BY EITHER THE A SSESSING OFFICER OR THE LEARNED DR. IT IS A FACT THAT THE RATE OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN VIS-A-VIS THE RATE OF INTEREST IN SE CURED LOAN OBTAINED FROM THE BANK AND FINANCIAL INSTITUTIONS THE RATE OF IN TEREST TO ASSOCIATE CONCERN IS LITTLE HIGHER BUT THE AMOUNTS BORROWED FROM BANK ARE SECURED AND HENCE CARRIES LESSER RISK. EVEN THE BANK INTEREST IS ALMO ST AT 19.5% AND IF WE CALCULATE THE OVERHEAD EXPENSES I.E. THE REGISTRATI ON CHARGES STAMP DUTY CHARGES EXPENSES TO BE INCURRED FOR SUBMITTING STO CK STATEMENTS ETC. TO THE BANK THE BANK INTEREST WILL AUTOMATICALLY INCR EASE TO A CERTAIN LEVEL. THEREFORE THE COMPARISON OF RATE OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN WITH THE SECURED LOAN IS INCORRECT. IT IS ALSO SETTLED LAW THAT THE DECISION HOW THE BUSINESS SHOULD BE CARRIED ON IS THE PREROGATIVE OF ITA NO.1952/AHD/2008 11 THE ASSESSEE AND THE ASSESSING OFFICER CANNOT DICTA TE THE TERMS AS TO HOW THE BUSINESS SHOULD BE CARRIED ON. WHILE CONSIDERIN G THE CLAIM UNDER SECTION 36(1)(III) WHAT IS TO BE EXAMINED IS WHETHE R THE AMOUNT IS BORROWED FOR THE PURPOSE BUSINESS OR NOT. SINCE THE AMOUNT IS BORROWED IN EARLIER YEARS AT A STIPULATED RATE OF INTEREST AND WHICH IS STILL UTILIZED FOR THE PURPOSE OF BUSINESS THE INTEREST RATE COULD NOT HA VE BEEN RENEGOTIATED. EVEN THE LENDING RATE BY BANKS IN RESPECT OF SECURE D LOAN IS AS HIGH AS 19.5%. THEREFORE RATE OF INTEREST PAID BY THE ASSE SSEE IS REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF SUCH SERV ICES. THE ASSESSING OFFICER HAS NOT COMPARED THE RATE OF INTEREST ON UN SECURED LOANS. THEREFORE THE ASSESSING OFFICER WAS INCORRECT IN R ESTRICTING THE INTEREST PAYABLE TO THE EXTENT OF 19.5% ONLY. SINCE THE RAT E OF INTEREST PAID BY THE ASSESSEE IS REASONABLE THE ORDER OF CIT(A) IS CONF IRMED DELETING THE DISALLOWANCE. 10.1 IN THE LIGHT OF VIEW TAKEN BY THE ITAT IN TH EIR AFORESAID DECISION FOR THE AYS 2002-03 & 2003-04 A SIMILAR D ISALLOWANCE WAS DELETED IN THE AY 2004-05 ALSO. UNDISPUTEDLY THE A SSESSEE PAID INTEREST @18%PA IN THE YEAR UNDER CONSIDERATION ON THE AMOUNT BORROWED FROM THE PERSONS COVERED U/S 40A(2)(B) OF THE ACT WHILE THE INTEREST ON CLEAN OVERDRAFT WORKED OUT TO 17.81 % P.A. AS PER CERTIFICATE ISSUED BY BANK OF BARODA FILED BEFORE T HE AO. IN THESE CIRCUMSTANCES WE ARE OF THE OPINION THAT THE RATE OF INTEREST PAID BY THE ASSESSEE IS REASONABLE HAVING REGARD TO THE FAIR MA RKET VALUE . THEREFORE THE ASSESSING OFFICER WAS NOT JUSTIFIED IN RESTRICTING THE INTEREST PAYABLE TO THE EXTENT OF 15% ONLY. IN THE LIGHT OF VIEW TAKEN BY THE ITAT IN THEIR AF ORESAID DECISIONS IN THE ASSESSEES OWN CASE IN THE PRECEDING ASSESS MENT YEARS WHILE THE RATE OF INTEREST PAID BY THE ASSESSEE IS COMPARABLE WITH TH E RATE OF INTEREST CHARGED BY THE BANK ON THE SECURED BORROWINGS AND THE REVENU E HAVING NOT PLACED BEFORE US ANY MATERIAL WARRANTING INTERFERENCE WITH THE C ONCLUSION DRAWN BY THE LD. CIT(A) WE ARE NOT INCLINED TO TAKE A DIFFERENT VI EW IN THE MATTER. THEREFORE FINDINGS OF THE LD. CIT(A) ARE UPHELD AND GROUND NO .2 IN THE APPEAL IS DISMISSED. 11. GROUND NO.3 IN THE APPEAL RELATES TO DISALLOWAN CE OF RS.4 42 620/- U/S 80IA OF THE ACT. RELYING UPON H IS OWN FINDINGS IN THE PRECEDING ASSESSMENT YEARS THE AO INTER ALIA EXCLUDED MOTOR HIRE CHARGES RENTAL INCOME COMPUTER RENT MISCELL ANEOUS INCOME ITA NO.1952/AHD/2008 12 AND INTEREST ON FDR WHILE COMPUTING DEDUCTION U/S 80IA OF THE ACT THESE RECEIPTS HAVING NOT BEEN DERIVED FROM THE BUS INESS OF THE INDUSTRIAL UNDERTAKING AT HIRAGAN UNIT OF THE ASSES SEE IN THE LIGHT OF VIEW TAKEN IN THE DECISIONS REPORTED IN AHMEDABAD MANUFACTURING AND CALICO PRINTING CO. LTD. VS. CIT 137 ITR 616(GU J) COCHIN COMPANY V. C1T (1978) 114 ITR 822(KERALA) HINDUSTA N LEVER LTD. V. CIT [1980] 121 ITR 951(BOMBAY) AND CIT V. STERLI NG FOODS [1999] 237 1TR 579(SC). THEREFORE THE AO RESTRICTED THE D EDUCTION U/S 80IA OF THE ACT TO RS.22 20 228. 12. ON APPEAL THE LEARNED CIT(A) FOLLOWING HIS OW N DECISION FOR THE AY 2004-05 CONCLUDED THAT THE RECEIPTS LIKE R ENTAL INCOME COMPUTER RENTAL RECEIPTS AND MISCELLANEOUS INCOME CANNOT FOR M PART OF THE BUSINESS INCOME OF THE ASSESSEE AND ARE THEREFORE NOT ENT ITLED FOR DEDUCTION. AS REGARDS THE INTEREST RECEIPTS AND MOTOR HIRING CHARGES T HE LD. CIT(A) CONCLUDED THAT THESE BEING BUSINESS RECEIPTS AND THE NET OF THE P AYMENTS AND RECEIPTS WERE ONLY NEGATIVE RECEIPTS AND THEREFORE ELIGIBLE F OR THE DEDUCTION. ACCORDINGLY THE LD. CIT(A) DIRECTED THE AO TO RECOMPUTE THE DEDUC TION RESTRICTING RECEIPTS LIKE ONLY RENTAL INCOME AND MISCELLANEOUS INCOME AND AL LOW INTEREST RECEIPTS AND MOTOR HIRE CHARGES WHILE COMPUTING DEDUCTION U/S 80 IA OF THE ACT. 13. THE REVENUE IS IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). BOTH THE PARTIES AG REED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 2-7-2010 OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE AY 2004-05 IN ITA NO.2121/AHD/2007. 14. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISIONS OF THE ITA T. WE FIND THAT THE ITAT WHILE ADJUDICATING A SIMILAR ISSUE IN THE ASSESSEES OWN CASE FOR THE AY 2004-05 IN ITA NO.2121/AHD/2007 CON CLUDED IN THEIR ORDER DATED 02-07-2010 AS UNDER:- ITA NO.1952/AHD/2008 13 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE IMPUGNED ORD ERS THE AO DISALLOWED THE CLAIM FOR DEDUCTION U/S 80IB OF THE ACT ON THE GRO UND THE RECEIPTS BY WAY OF INTEREST ON FIXED DEPOSITS WITH THE BANK AND MOTOR HIRE CHARGES WERE NOT DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING WHI LE THE LD. CIT(A) WITHOUT RECORDING ANY FINDINGS ON THIS ASPECT PROCEEDED T O NET OFF THE RECEIPTS AND PAYMENTS AND THAT TOO WITHOUT MAKING REFERENCE TO ANY MATERIAL ESTABLISHING THE NEXUS OF RECEIPTS WITH PAYMENTS AND WITHOUT AFFORD ING ANY OPPORTUNITY TO THE CONCERNED AO. AS REGARDS EXCLUSION OF INTEREST ON FDRS FROM THE ELIGIBLE PROFITS FOR THE PURPOSE OF DEDUCTION U/S 80IB OF THE ACT T HE LEADING DECISION IS THAT OF THE HON'BLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 WHICH HOLDS THAT INTEREST EARNED ON DEPOSITS PLACE D FOR THE PURPOSES OF OBTAINING LOANS FOR BUSINESS CANNOT BE TREATED A S BUSINESS INCOME BUT ONLY AS INCOME FROM OTHER SOURCES.. THE DECISION IN TUTICOR IN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 WHICH WAS RENDERED IN THE CONTEXT OF SECTIONS 56 AND 57 HAS BEEN FOLLOWED IN CIT V. AUTOKAST LTD . [2001] 248 ITR 110 (SC). LIKEWISE IN CIT V. DR. V. P. GOPINATHAN [2001] 248 ITR 449 (SC) INTEREST ON FIXED DEPOSITS WAS HELD NOT TO QUALIFY FOR SETTING OFF AG AINST INTEREST ON LOANS BORROWED. THE OTHER DECISIONS ON THE SAME LINES IN THE CONTE XT OF SECTION 80HHC ARE CIT V. STERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC). IN THESE DECISIONS THE HON'BLE SUPREME COUR T REITERATED THE NEXUS THEORY AND DECLINED TO TREAT S UCH INTEREST EARNED AS BUSINESS INCOME. THE DECISION OF THE MADRAS HIGH COURT IN SO UTH INDIA SHIPPING CORPORATION LTD. V. CIT [1999] 240 ITR 24 WAS ALSO RENDERED IN THE CONTEXT OF TREATING CERTAIN RECEIPTS NOT AS BUSINESS INCOME BU T INCOME FROM OTHER SOURCES FOR THE PURPOSES OF SECTION 56 READ WITH SECTION 57 (III) OF THE ACT. IN CASES WHERE THE ASSESSEE IS REQUIRED TO MANDATORILY KEEP MONIES IN FIXED DEPOSIT IN ORDER TO AVAIL OF CREDIT FACILITY THE ARGUMENT ON BEHALF OF THE ASSESSEE IS THAT BUT FOR SUCH A STIPULATION BY THE BANK THERE WAS NO NEED FOR THE ASSESSEE TO KEEP THE MONEY IN FIXED DEPOSIT AND THEREFORE THE INCOME EARNED F ROM SUCH FIXED DEPOSITS BEARS A DIRECT NEXUS TO THE BUSINESS ACTIVITY ITSELF. GIV EN THE REPEATED AFFIRMATION BY THE HON'BLE SUPREME COURT IN THE VARIOUS CASES WE ARE OF THE OPINION THAT INTEREST EARNED FROM THE BANK DOES NOT HAVE AN IMMEDIATE NE XUS WITH THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND THEREFORE CAN NOT B E SAID TO BE DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING . 13.1 IN THE CASE OF AHMEDABAD MANUFACTURING AND CALICO PRINTING CO. LTD. VS.CIT 137 ITR 616(GUJ) HONBLE JURISDICTIONAL HIGH COURT HELD WE ARE IN FULL AGREEMENT WITH THE VIEW TAKEN BY TH E BOMBAY HIGH COURT AND TO SOME EXTENT WITH THE VIEW TAKEN BY THE KERAL A HIGH COURT. PROFITS AND GAINS CAN BE SAID TO HAVE BEEN ' DERIVED ' FROM AN ACTIVITY CARRIED ON BY A PERSON ONLY IF THE SAID ACTIVITY IS AN IMMEDIA TE AND EFFECTIVE SOURCE OF THE SAID PROFIT OR GAIN. THERE MUST BE A DIRECT NEXUS BETWEEN THE ACTIVITY AND THE EARNING OF THE PROFITS AND GAINS. IN OTHER WORDS WHAT WE HAVE TO CONSIDER IS THE PROXIMATE SOURCE AND NOT TH E SOURCE TO WHICH THE PROFIT OR GAIN MAY IN A REMOTE INDIRECT WAY BE REFE RABLE. THE VIEW TO THIS ITA NO.1952/AHD/2008 14 EFFECT OF THE PRIVY COUNCIL IN CIT V. KAMAKHYA NARA YAN SINGH [1948] 16 ITR 325 WAS APPROVED BY THE SUPREME COURT IN MRS. BACHA F. GUZDAR V. CIT [1955] 27 ITR 1 AND FOLLOWED BY THE KERALA HIGH COURT IN COCHIN CO MPANY V. CIT [1978] 114 ITR 822 AND BY THE BOMBAY HIGH COURT IN HINDUSTAN LEVER LTD. V. CIT [1980] 121 ITR 951 . IN OUR OPINION THE WORD ' DERIVE ' TO BE FOUND IN S. 2(5)(A)(I) OF THE RELEVANT FINANCE ACT WILL H AVE TO BE GIVEN A MEANING CONSISTENT WITH WHAT WAS DECIDED IN THE ABOVE DECIS IONS. THE WORDS 'DERIVED FROM EXPORTS' CANNOT BE ACCEPTED AS EQUIVA LENT TO ' REFERABLE TO EXPORTS ' OR EVEN INDIRECTLY OR REMOTELY CONNECTED WITH THE EXPORTS BY A NEBULOUS LINK. 13.2 HONBLE PUNJAB AND HARYANA HIGH COURT IN TH E CASE OF NAHAR EXPORTS VS. CIT 288 ITR 494 UPHELD DISALLOWANCE OF CLAIM FOR DE DUCTION U/S 80IA OF THE ACT ON THE INTEREST INCOME IN THE LIGHT OF AFORESAID DECISIONS OF THE APEX COURT IN STERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 .. 13.3 FOR THE PURPOSE OF CLAIMING DEDUCTION UNDE R S. 80-IB OF THE ACT THE ASSESSEE IS NOT ONLY REQUIRED TO ESTABLISH THAT IT WAS BUSINESS PROFIT OF THE INDUSTRIAL UNDERTAKING BUT ALSO TO ESTABLISH THAT THIS WAS A PROFIT 'DERIVED FROM' THE BUSINESS ACTIVITY OF AN INDUSTRIAL UNDERTAKING WH ICH MEANS A DIRECT NEXUS BETWEEN THE PROFITS AND INDUSTRIAL UNDERTAKING. THE MERE FACT THAT SUCH INCOME WAS A BUSINESS INCOME WOULD NOT ENTITLE THE ASSESSE E FOR DEDUCTION UNDER S. 80- IB OF THE ACT. AS HELD BY THE HONBLE SUPREME COURT IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. V. CIT [1978] 113 ITR 84 THE PROFITS OR GAINS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB OF THE ACT MUST BE DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS AND UNLESS THE PROFITS OR GAINS AR E DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS IT CANNOT BE STATED THAT T HE INTEREST IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WO RDS THE INDUSTRIAL UNDERTAKING MUST DIRECTLY YIELD THE PROFIT AND IT CANNOT BE TH E MEANS TO YIELD THE INCOME. THE FACT THAT THE AMOUNT WAS ASSESSED AS BUSINESS INCOM E ITSELF WOULD NOT BE SUFFICIENT TO HOLD THAT THE INTEREST INCOME WAS DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHE R WORDS IT IS NOT ALL BUSINESS RECEIPTS THAT WOULD QUALIFY FOR THE DEDUCTION AND T HE LEGISLATURE HAS APPARENTLY NOT INTENDED TO GIVE THE BENEFIT OF DEDUCTION TO AL L BUSINESS INCOME. IF THE INTENTION OF THE LEGISLATURE WAS TO GRANT RELIEF TO ALL BUSINESS INCOME IT COULD HAVE USED THE EXPRESSION 'PROFITS AND GAINS OF IND USTRIAL UNDERTAKING' THE FACT THAT THE LEGISLATURE HAS USED THE EXPRESSION 'PROFI TS AND GAINS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING' HAS SOME SIGNI FICANCE AND IT CONNOTES THAT THE IMMEDIATE AND EFFECTIVE SOURCE OF INCOME ELIGIB LE FOR GRANT OF RELIEF UNDER SECTION 80IB OF THE ACT MUST BE THE INDUSTRIAL UNDE RTAKING ITSELF AND NOT ANY OTHER SOURCE. THE MANDATE OF LAW IS THAT UNLESS THE SOURC E OF THE PROFIT IS THE UNDERTAKING THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IB OF THE ACT. MERE COMMERCIAL CONNECTION BETWEEN THE INC OME AND THE INDUSTRIAL UNDERTAKING WOULD NOT BE SUFFICIENT. THE DERIVATION OF THE INCOME MUST BE DIRECTLY CONNECTED WITH THE BUSINESS IN THE SENSE THAT THE I NCOME IS GENERATED BY THE ITA NO.1952/AHD/2008 15 BUSINESS. IT WOULD NOT BE SUFFICIENT IF IT IS GENER ATED BY THE EXPLOITATION OF A BUSINESS ASSET. 13.4 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.GASKETS AND RADIATORS DISTRIBUTORS 296 ITR 440(GUJ) IN THE CON TEXT OF DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF INCOME ON ACCOUNT OF INTEREST ON FIXED DEPOSITS HELD IDENTICAL QUESTION CAME TO BE CONSIDERED BY THE HO N'BLE SUPREME COURT IN PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 AND THE QUESTION WHICH WAS POSED FOR CONSIDERATION BEFORE THE APEX COURT W AS WHETHER THE INTEREST ON DEPOSITS WITH THE TAMIL NADU ELECTRICIT Y BOARD SHOULD BE TREATED AS INCOME DERIVED BY THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF SECTION 80HH OR NOT AND THE HON'BLE SUPREME COURT HAS OBSE RVED THAT SECTION 80HH OF THE INCOME-TAX ACT GRANTS DEDUCTION IN RESP ECT OF PROFITS AND GAINS 'DERIVED FROM' AN INDUSTRIAL UNDERTAKING AND THE WORDS 'DERIVED FROM' IN SECTION 80HH OF THE INCOME-TAX ACT 1961 MUST BE UNDERSTOOD AS SOMETHING WHICH HAS A DIRECT OR IMMEDIATE NEXUS WIT H THE ASSESSEE'S INDUSTRIAL UNDERTAKING. THE SUPREME COURT HELD THAT INTEREST DERIVED BY THE INDUSTRIAL UNDERTAKING OF THE ASSESSEE ON DEPOSITS MADE WITH THE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELECTRICIT Y FOR RUNNING THE INDUSTRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSELF AND WAS NOT PROFITS OR GAINS DER IVED BY THE UNDERTAKING FOR THE PURPOSE OF THE SAID DEDUCTION UNDER SECTION 80HH. IN G.T.N. TEXTILES LTD. V. DY. CIT [2005] 279 ITR 72 THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FROM EXPORT OF GOODS. THE KERALA HIGH COURT HAS FURTHER HELD THAT THE INTEREST EARNED BY THE ASSESSEE ON FIXED DEPOSITS COMMISSION RECEIVED ON SALE OF MACHINERY ETC. WERE NOT BUSINESS INCOME AND CONSEQUENTLY THE ASSESSEE WAS N OT ENTITLED TO COMPUTATION OF ELIGIBLE DEDUCTION UNDER SECTION 80H HC OF THE ACT BY INCLUDING THOSE RECEIPTS UNDER BUSINESS INCOME. THE REFORE CONSIDERING THE AFORESAID TWO DECISIONS WE MUST HOLD THAT THE TRIB UNAL AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS) BOTH COMMITTE D AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCO ME' AND GRANTING THE ASSESSEE THE DEDUCTION UNDER SECTION 80HHC OF THE A CT.. 14. IN THE INSTANT CASE AS ALREADY POINTED O UT THE LD. CIT(A) HAS NOT RECORDED ANY FINDINGS AS TO WHETHER OR NOT RECEIPTS ON ACCOUNT OF INTEREST OR MOTOR HIRE CHARGES WERE DERIVED FROM THE ACTUAL CON DUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND WHETHER ANY EXPENDITURE WAS ALSO ACTUALLY INCURRED BY THE ASSESSEE IN EARNING THESE RECEIPTS. A MERE GLAN CE AT THE OBSERVATIONS OF THE LD. CIT(A) IN PARA 5.2.1 & 5.2.2 OF HIS ORDER REVEA LS THAT THE LD. CIT(A) HAVE NOT PASSED A SPEAKING ORDER. WE ARE OF THE OPINION THAT THE APPLICATION OF MIND TO THE MATERIAL FACTS AND THE ARGUMENTS SHOULD MANIFEST IT SELF IN THE ORDER. SECTION 250(6) OF THE INCOME TAX ACT MANDATES THAT THE ORDE R OF THE CIT(A) WHILE DISPOSING OF THE APPEAL SHALL BE IN WRITING AND SHA LL STATE THE POINTS FOR DETERMINATION THE DECISION THEREON AND THE REASON FOR THE DECISION. AS IS ITA NO.1952/AHD/2008 16 APPARENT FROM THE IMPUGNED ORDER IN OUR OPINION T HE ORDER PASSED BY THE LD. CIT(A) IS CRYPTIC AND GROSSLY VIOLATIVE OF ONE OF THE FACETS OF THE RULES OF NATURAL JUSTICE NAMELY THAT EVERY JUDICIAL/QUASI-JUDICIAL BODY/AUTHORITY MUST PASS REASONED ORDER WHICH SHOULD REFLECT APPLICATION OF MIND BY THE CONCERNED AUTHORITY TO THE ISSUES/POINTS RAISED BEFORE IT. TH E REQUIREMENT OF RECORDING OF REASONS AND COMMUNICATION THEREOF HAS BEEN READ AS AN INTEGRAL PART OF THE CONCEPT OF FAIR PROCEDURE AND SAFEGUARD TO ENSURE O BSERVANCE OF THE RULE OF LAW. IT INTRODUCES CLARITY CHECKS THE INTRODUCTION OF E XTRANEOUS OR IRRELEVANT CONSIDERATIONS AND MINIMIZES ARBITRARINESS IN THE D ECISION-MAKING PROCESS. WE MAY POINT OUT THAT A DECISION DOES NOT MERELY MEA N THE CONCLUSION. IT EMBRACES WITHIN ITS FOLD THE REASONS FORMING BASIS FOR THE CONCLUSION.[MUKHTIAR SINGH VS. STATE OF PUNJAB (1995)1SCC 760(SC)]. 14.1 IN VIEW OF THE FOREGOING ESPECIALLY WHEN T HE LD. CIT(A) HAS NOT PASSED A SPEAKING ORDER WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE ISSUE RAISED IN THIS GROUND NO.3 TO HIS FILE FOR DECIDING THE MATTER AFRESH IN ACCORDANCE WITH LAW AFTER ALLOWIN G SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES AND KEEPING IN VIEW THE VARIOUS JUDICIA L PRONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE. NEEDLESS TO SAY THAT WHILE REDECIDING THE APPEAL THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER KEEPING IN MIND INTER ALIA THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. W ITH THESE OBSERVATIONS GROUND NO. 3 IS DISPOSED OF. 14.1 IN THE LIGHT OF VIEW TAKEN BY THE ITAT IN T HE PRECEDING ASSESSMENT YEAR SINCE IN THE YEAR UNDER CONSIDERAT ION ALSO THE LD. CIT(A) MERELY FOLLOWED HIS OWN DECISION IN THE PRE CEDING ASSESSMENT YEAR AND DID NOT PASS A SPEAKING ORDER WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. C IT(A) AND RESTORE THE ISSUE RAISED IN THIS GROUND NO.3 TO HIS FILE FOR DECIDING THE MATTER AFRESH IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES AND KEEPING IN VIEW THE VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE. NEEDLESS TO SAY THAT WHILE REDECIDING THE APPEAL T HE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER KEEPING IN MIND INTER ALIA THE MA NDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. WITH THESE OBSERVATIONS GROUND NO. 3 IS DISPOSED OF. 15. GROUND NOS.4 AND 5 BEING PRAYER AND GENERAL IN NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE THER EFORE DISMISSED. ITA NO.1952/AHD/2008 17 16. IN THE RESULT APPEAL IS PARTLY ALLOWED BUT FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 30-09-2010 SD/- SD/- (MUKUL SHRAWAT) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 30-09-2010 COPY OF THE ORDER FORWARDED TO: 1. PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT. LTD. 1 02 POPULAR HOUSE ASHRAM ROAD AHMEDABAD 2. DCIT CIRCLE-5 AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-XI AHMEDABAD 5. DR BENCH-C ITAT AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD