M/s Foods, Fats & Fertilizers Ltd, Tadepallegudem v. The DCIT, Circle-1, Eluru

ITA 449/VIZ/2003 | 1999-2000
Pronouncement Date: 21-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 44925314 RSA 2003
Assessee PAN AAACF2643K
Bench Visakhapatnam
Appeal Number ITA 449/VIZ/2003
Duration Of Justice 7 year(s) 3 month(s) 8 day(s)
Appellant M/s Foods, Fats & Fertilizers Ltd, Tadepallegudem
Respondent The DCIT, Circle-1, Eluru
Appeal Type Income Tax Appeal
Pronouncement Date 21-01-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 21-01-2011
Date Of Final Hearing 03-11-2010
Next Hearing Date 03-11-2010
Assessment Year 1999-2000
Appeal Filed On 13-10-2003
Judgment Text
ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 1 OF 13 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO.449/VIZAG/2003 ASSESSMENT YEAR: 1999-2000 FOODS FATS & FERTILIZERS LTD. TADEPALLIGUDEM VS. DY.CIT CIRCLE-1 ELURU (APPELLANT) PAN NO: AAACF 2643 K (RESPONDENT) ITA NO.450/VIZAG/2003 ASSESSMENT YEAR: 1999-2000 DY.CIT CIRCLE-1 ELURU VS. FOODS FATS & FERTILIZERS LTD. TADEPALLIGUDEM (APPELLANT) (RESPONDENT) PAN NO: AAACR 2643 APPELLANT BY: SHRI C. SUBRAMANYAM CA RESPONDENT BY: SHRI T.L. PETER CIT (DR) ORDER PER SHRI B. R. BASKARAN ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 31.7.2003 PASSED BY LD. CIT(A)-I VISAKHAPATNAM AND THEY RELA TE TO THE ASSESSMENT YEAR 1999-2000. 2. BOTH THE PARTIES ARE AGGRIEVED WITH THE AMOUN T DETERMINED BY LEARNED CIT(A) AS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HH C OF THE ACT. 3. THE FACTS RELATING TO THE ISSUE ARE STATED IN BRIEF. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURE OF EDIBLE OILS AND ALSO DOING EXPORTS. IN THE RETURN OF INCOME FILED BY IT FOR THE YEAR UNDER CON SIDERATION THE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80HHC OF THE ACT IN RESPECT OF ITS BUSINESS PROFIT OF RS.1 37 38 902/- WHICH INCLUDED INTEREST INCOME RENTAL INCOME ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 2 OF 13 ETC. TO THE TUNE OF RS.1 60 36 600/-. HOWEVER THE ASSESSING OFFICER OPINED THAT THE SAID RECEIPTS AGGREGATING TO RS.1 60 36 60 0/- DO NOT FALL IN THE CATEGORY OF BUSINESS RECEIPTS AND ACCORDINGLY HE EXCLUDED THE SAME FROM THE BUSINESS PROFIT AND TREATED THEM AS INCOME UN DER THE HEAD INCOME FROM OTHER SOURCES. AS A RESULT THE BUSINESS INC OME OF THE ASSESSEE TURNED INTO A NEGATIVE FIGURE OF RS.22 97 698/- MAK ING THE ASSESSEE INELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE LEARNED CIT(A). DURING THE COURSE OF APPELLATE PROCEEDINGS THE LEARNED CIT(A) CALLED FO R A REPORT FROM THE ASSESSING OFFICER ON THE SUBMISSIONS MADE BY THE AS SESSEE AND ALSO CALLED FOR THE WORKINGS FOR ELIGIBLE DEDUCTION UNDER SECTI ON 80HHC OF THE ACT. THE ASSESSING OFFICER FURNISHED THE DETAILS OF ELIGIBLE DEDUCTION U / S 80HHC AS UNDER: PROFIT FROM MANUFACTURED GOODS EXPORTED (- ) 1 57 435 NET PROFIT FROM TRADED GOODS EXPORTED (-) 10 824 INCENTIVES (AS PER ASSESSEE) 25 04 589 3.1 BEFORE THE LEARNED CIT(A) THE ASSESSEE ALS O REVISED ITS WORKINGS ON ELIGIBLE DEDUCTION UNDER SECTION 80HHC AND FINALLY ARRIVED AT A FIGURE OF RS.2 66 61 414/-. HOWEVER AFTER DECIDING VARIOUS ISSUES THE LEARNED CIT(A) HIMSELF REWORKED THE ELIGIBLE DEDUCTION AND ARRIVED AT A FIGURE OF RS.1 75 93 459/-. AGGRIEVED BY THE ORDER OF LEARN ED CIT(A) BOTH THE PARTIES ARE IN APPEAL BEFORE US. 4. THE REVENUE HAS FILED ITS APPEAL WITH THE FO LLOWING GROUNDS: 1. THE APPELLATE ORDER OF THE CIT (A) IS NOT ACCEPT ABLE. 2. THE CIT(A) WAS NOT JUSTIFIED IN COMPUTING THE DE DUCTION UNDER SECTION 80HHC WITHOUT GIVING OPPORTUNITY TO T HE ASSESSING OFFICER. 3. THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC ARRIVED AT BY THE CIT (A) IS NOT ACCEPTABLE. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 3 OF 13 4. THE CIT (A) WAS NOT JUSTIFIED IN COMING TO THE CONCLUSION THAT THE MANUFACTURING ACTIVITY HAS NO D IRECT RELATION TO THE TRADING OF EXPORT. 5. THE CIT (A) OUGHT TO HAVE NOTED THAT OUT OF THE EXPORTS EFFECTED BY THE ASSESSEE TWO COMMODITIES I.E. SAL- STEARINC AND KOKUM FAT ARE HAVING RELATION WITH MANUFACTURIN G ACTIVITY. 6. THE CIT (A) WAS NOT JUSTIFIED IN NOT TAKING INTO ACCOUNT THE DEPRECIATION ALLOWANCE AS INDIRECT COST AS TWO COMMODITIES EXPORTED BY THE ASSESSEE ARE HAVING DIRECT RELATION TO THE MANUFACTURING ACTIVITY. 7. THE APPELLANT/ASSESSING OFFICER CRAVE LEAD TO AD D AMEND OR ALTER ANY OF THE GROUNDS AS THE CASE MAY A RISE. 8. FOR THIS AND OTHER GROUND OF APPEAL THAT SHALL B E URGED AT THE TIME OF HEARING OF THE APPEAL THE APPELLANT /ASSESSING OFFICER PRAYS BEFORE THE HON'BLE I.T.A.T. THAT THE A DDITIONS MADE BY THE ASSESSING OFFICER MAY KINDLY BE RESTORE D AS PRAYED IN GROUNDS OF APPEAL. 4.1 THE GROUNDS NUMBERED AS 1 3 4 7 AND 8 ARE GENERAL IN NATURE AND HENCE THEY REQUIRE NO ADJUDICATION. IN GROUND NO.2 IT IS STATED THAT THE LEARNED CIT(A) DID NOT PROVIDE OPPORTUNITY TO THE A SSESSING OFFICER. HOWEVER WE NOTICE THAT THE LEARNED CIT(A) DID CALL FOR A REPORT FROM THE ASSESSING OFFICER ON THE SUBMISSIONS MADE BY THE AS SESSEE AND HENCE WE DO NOT FIND ANY MERIT IN THIS GROUND AND ACCORDING LY DISMISS THE SAME. IN GROUND NO.5 THE DEPARTMENT IS STATING ABOUT THE RE LATIONSHIP BETWEEN THE MANUFACTURING AND TRADING ACTIVITY. HOWEVER IT IS NOT SHOWN HOW THE EFFECT OF SUCH RELATIONSHIP HAS AFFECTED THE WORKING OF DE DUCTION UNDER SECTION 80HHC. HENCE WE ARE UNABLE TO EXPRESS ANY OPINION ON THE SAME AND ACCORDINGLY DISMISS THE SAID GROUND. IN GROUND NO.6 THE REVENUE IS ASSAILING THE DECISION OF LEARNED CIT(A) IN CONSIDE RING THE DEPRECIATION AMOUNT AS INDIRECT COST. IT MAY BE NOTED THAT THE QUESTION OF DIRECT AND INDIRECT COSTS ARISES ONLY IN THE CONTEXT OF COMPUT ING DEDUCTION FOR TRADING EXPORTS. BEFORE US NO MATERIAL WAS BROUGHT ON REC ORD TO SHOW THAT ANY PORTION OF DEPRECIATION AMOUNT SHALL FORM PART OF T HE DIRECT COST VIZ-A-VIS ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 4 OF 13 TRADING EXPORT. IN THESE CIRCUMSTANCES WE ARE UNA BLE TO INTERFERE WITH THE DECISION OF LEARNED CIT(A) IN CONSIDERING THE ENTIR E DEPRECIATION CLAIMED BY THE ASSESSEE AS THE INDIRECT COST IN ORDER TO ARRIV E AT THE PROPORTIONATE INDIRECT COST RELATABLE TO THE TRADING EXPORTS. HENCE THIS GROUND OF THE REVENUE IS ALSO DISMISSED. 5 THE ASSESSEE HAS FILED ITS APPEAL WITH THE FO LLOWING GROUNDS IN THE REFRAMED GROUNDS OF APPEAL: 1. COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORR ECT EITHER ON FACTS OR IN LAW TO TREAT AN AMOUNT OF RS .6685523/- THE DETAILS OF WHICH CAN BE FOUND AT PAGE-20 OF THE ORDER AS INCOME FROM OTHER SOURCES AND EXCLUDING THE SAME FR OM THE PROFIT OF THE BUSINESS FOR COMPUTATION OF ELIGIBLE DEDUCTION UNDER SECTION 80HHC(3). 2. THE APPELLANT SUBMITS THAT THE COMMISSIONER OF IN COME TAX (APPEALS) HAS INCLUDED AN AMOUNT OF RS.704567/- BE ING THE FOREIGN TRAVEL EXPENSES IN THE DIRECT COST OF TRAD ED GOODS AND DEDUCTED THE SAME FOR THE PURPOSE OF DETERMINING TH E PROFITS FROM TRADED GOODS WHICH IS NOT CORRECT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) HAVING ALREADY TAKEN THE INTEREST ON PACKING CREDIT AS DIRECT COST OF TRADED GOODS SHOULD NOT HAVE APPORTIONED THE INTEREST AMO UNT OF RS.31721519/- AS INDIRECT COST OF TRADED GOODS AS THIS COULD LEAD TO A DISTORTED POSITION. 4. THE APPELLANT SUBMITS THAT IN ANY CASE THE INTE REST OF RS.12956771/- PAID ON BILLS DISCOUNTED ON IMPORTED OILS IS ATTRIBUTABLE TO IMPORTED OILS ONLY AS A DIRECT COST AND SHOULD NOT BE INCLUDED AS AN INDIRECT COST OF TRADED GOODS . 5. THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN ADOPTING PROPORTION ATE DEPRECIATION AS PART OF DIRECT COST OF TRADED GOODS . SINCE NO ASSETS WERE ACQUIRED FOR THE PURPOSE OF EXPORT TRAD E. 6. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN ATTRIBUTING 10% OF OTHER INCOME AND EXPO RT INCENTIVE AS INDIRECT EXPENSES AND ALLOCATE THE SAME TO THE E XPORT TRADE. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 5 OF 13 7. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN EXCLUDING 90% OF THE GROSS INTEREST RECEIPTS HE SH OULD HAVE EXCLUDED ONLY 90% OF NET INTEREST RECEIPTS. 8. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN TREATING DAMAGES FOR NON-FULFILLMENT OF CONTRACTS A S FALLING UNDER CLAUSE (BAA) OF EXPLANATION TO SUB-SEC.4(B) O F SEC.80HHC. 5.1 AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING GROUNDS NUMBERED AS 2 5 AND 6 CITED ABOVE AND HENCE THEY WERE DISMISSED AS WITHDRAWN. 6. IN THE FIRST GROUND THE ASSESSEE IS ASSAILING THE DECISION OF LEARNED CIT(A) IN HOLDING THAT INTEREST INCOME AGGREGATING TO RS.66 85 523/- IS TO BE TREATED AS INCOME CHARGEABLE UNDER THE HEAD INC OME FROM OTHER SOURCES. AS STATED EARLIER THE ASSESSING OFFICER EXCLUDED FOLLOWING AMOUNTS AGGREGATING TO RS.1 60 36 600/- FROM THE BU SINESS INCOME AND TREATED THEM AS INCOME UNDER THE HEAD INCOME FROM O THER SOURCES. (I) INTEREST RECEIVED - 1 18 16 324/- (II) RENT RECEIVED - 1 07 871/- (III) DAMAGES RECEIVED FOR NON-FULFILLMENT OF CONTRACTS - 41 12 4 05/- ------------------ 1 60 36 600/- ========= WITH REGARD TO THE INTEREST RECEIPTS THE LEARNED C IT(A) ACCEPTED THAT VARIOUS AMOUNTS AGGREGATING TO RS.51 30 801/- ARE I N THE NATURE OF BUSINESS RECEIPTS. ACCORDINGLY HE TREATED THE BALAN CE AMOUNT OF RS.66 85 523/- AS INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER DURING THE COURSE OF HEARING T HE LEARNED A.R RESTRICTED HIS ARGUMENTS ONLY WITH REGARD TO THE INTEREST RECE IPT OF RS.55 10 769/- FROM A COMPANY NAMED M/S PENNAR PATTERSON LTD. ACC ORDINGLY THE ORDER OF LEARNED CIT(A) IS CONFIRMED WITH REGARD TO THE REMA INING AMOUNTS AGGREGATING TO RS.11 74 754/-. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 6 OF 13 6.1 ACCORDING TO THE LEARNED A.R THE INTEREST I NCOME OF RS.55 10 769/- HAS TO BE TREATED AS INCOME FROM BUSINESS AND THE ARGUMENTS ADVANCED BY HIM IN THIS REGARD ARE SUMMARIZED BELOW:- (A) THE ASSESSEE HAS ADVANCED MONEY TO A COMPANY N AMED M/S PENNAR PATTERSON LTD IN THE NORMAL COURSE OF ITS BU SINESS. (B) LENDING OF MONEY IS ONE OF THE OBJECTS OF THE COMPANY AS PER ITS MEMORANDUM OF ASSOCIATION. (C) IN EARLIER YEARS THE ASSESSEE DECLARED SIMILA R RECEIPTS UNDER THE HEAD INCOME FROM BUSINESS ONLY AND THE SAME HAS B EEN ACCEPTED BY THE DEPARTMENT. (D) RELIANCE WAS PLACED ON THE DECISIONS REPORTED IN 101 TTJ (CHA) 29; CIT VS. J.J. EXPORTERS (324 ITR 329 (CAL)) AND THE DECISION OF THIS BENCH IN THE CASE OF VBC INDUSTRIES LTD IN ITA NO.50 2/VIZAG/2005. 6.2 ON THE CONTRARY THE LEARNED DEPARTMENTAL R EPRESENTATIVE ADVANCED HIS ARGUMENTS ON THE FOLLOWING LINES. (A) THE ASSESSEE DID NOT PROVE THAT IT HAS CARRIE D ON MONEY LENDING BUSINESS AND THE IMPUGNED DEPOSIT MADE WITH M/S PEN NAR PATTERSON LTD. IS MONEY ADVANCED IN THE COURSE OF MONEY LENDING BUSIN ESS. (B) THE OBJECTS CLAUSE IN THE MEMORANDUM OF ASSOC IATION GENERALLY CONTAINS ALLY TYPES OF BUSINESSES AND HENCE THE SAM E CANNOT BE TAKEN AS A DECIDING FACTOR. (C) THE RULE OF RES JUDICATA SHALL NOT APPLY TO T HE INCOME TAX PROCEEDINGS AND HENCE THE TREATMENT ACCORDED IN THE EARLIER YEARS TO SUCH KIND OF RECEIPTS NEED NOT BE CONSIDERED. (D) THE ASSESSEE ITSELF HAS DECLARED THE IMPUGNED AMOUNT AS INTER CORPORATE DEPOSIT AND NOT AS MONEY LENDING ADVANCE . (E) THE ASSESSEE HAS NOT TAKEN SO CONTESTED ON TH IS ISSUE BEFORE THE ASSESSING OFFICER. (F) THE QUESTION WHETHER SUCH KIND OF RECEIPTS IS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES IS A QUESTION OF FACT WHICH HAS TO BE DECIDED ON THE BASIS OF SURROUNDING CIRCUMSTANCES O F EACH CASE. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 7 OF 13 (G) EVEN IF THE IMPUGNED INTEREST INCOME IS TO BE TREATED AS BUSINESS INCOME THE SAME HAS TO BE EXCLUDED FROM PROFITS OF BUSINESS AS PER CLAUSE (BAA) OF EXPLANATION TO SEC. 80HHC. (H) RELIANCE WAS PLACED ON THE DECISIONS REPORTED IN PANDIAN CHEMICALS LTD. (262 ITR 278 (S.C)) AND CIT VS. K.R AVINDRANATHAN NAIR (295 ITR 228 (S.C)). 6.3 WE HAVE HEARD THE RIVAL CONTENTIONS AND PER USED THE RECORD. IN THE CASE OF J.J. EXPORTERS (SUPRA) WHICH WAS RELIED U PON BY THE ASSESSEE THE HON'BLE CALCUTTA HIGH COURT DISMISSED THE APPEAL OF THE REVENUE BY HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL IN HOLDING THAT THE INTEREST INCOME EARNED FROM FIXED DEPOSITS MADE OUT OF SURPLUS FUNDS FOR TEMPORARY PERIOD. THUS IT CAN B E SEEN THE QUESTION WHETHER THE IMPUGNED INTEREST INCOME IS TO BE TREAT ED AS BUSINESS INCOME OR OTHER SOURCES INCOME IS A QUESTION OF FACT THAT HAS TO BE DECIDED ON THE BASIS OF CIRCUMSTANCES PREVAILING IN EACH CASE. WE NOTICE THAT THE LEARNED CIT(A) HAS TAKEN SUPPORT FROM THE FOLLOWING CASE LA W TO ANALYSE THE ISSUE AS TO WHEN THE INTEREST INCOME CAN BE THE TAKEN AS BUSINESS RECEIPTS. (A) ASST. CIT VS. SOUTH INDIA PRODUCE COMPANY (262 ITR 20 (KER)) (B) K.S.SUBBIAH PILLAI AND CO. VS. CIT (260 ITR 30 4 (MAD)) (C) CIT VS. A.S.NIZAR AHMED AND CO. (259 ITR 244 ( MAD)) (D) DR. V.P.GOPINATHAN (248 ITR 449 (S.C)) IN THE INSTANT CASE THE ASSESSEE HAS GIVEN MONEY TO M/S PENNAR PATTERSON LTD AND THE SAME HAS BEEN CLASSIFIED AS INTER CORP ORATE DEPOSITS BY THE ASSESSEE. IN COMMERCIAL PARLANCE THERE IS A LOT O F DIFFERENCE BETWEEN A DEPOSIT AND A LOAN IN TERMS OF NATURE MODALITI ES DOCUMENTS ETC. THE ASSESSEE HAS ONLY PLACED RELIANCE IN ONE OF THE CLA USES FOUND IN THE OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIATION TO SUPPORT ITS PLEA THAT IT IS CARRYING ON MONEY LENDING BUSINESS. AS POINTED OUT BY LEARNED D.R THE OBJECT CLAUSE OF THE MEMORANDUM GENERALLY CONTAINS ALL TYPES OF BUSINESSES AND HENCE IN OUR VIEW THE ASSESSEE HAS TO ADDUCE SOME OTHER CONTEMPORARY EVIDENCES IN SUPPORT OF ITS CLAIM THAT IT HAS CARRIED ON MONEY LENDING BUSINESS. HOWEVER NO SUCH MATERIAL WAS PL ACED ON RECORD BY THE ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 8 OF 13 ASSESSEE. THE FACTS PREVAILING IN THE CASE OF M/S V BC INDUSTRIES LTD. (SUPRA) IS DIFFERENT AND HENCE IN OUR VIEW THE AS SESSEE COULD NOT DERIVE SUPPORT FROM IT. IN VIEW OF THE FOREGOING WE DO N OT FIND ANY REASON TO INTERFERE WITH THE DECISION OF LEARNED CIT(A) ON TH IS ISSUE AND ACCORDINGLY UPHOLD THE SAME. 7. IN THE THIRD AND FOURTH GROUND THE ASSESSEE IS ASSAILING THE DECISION OF LEARNED CIT(A) IN TREATING THE INTEREST EXPENDIT URE OF RS.3 17 21 519/- AS PART OF INDIRECT COSTS. THE LEARNED CIT (A) I NCLUDED THE FOLLOWING INTEREST AMOUNTS IN THE INDIRECT COSTS FOR THE PURP OSE OF ARRIVING AT THE INDIRECT COSTS RELATING TO TRADING EXPORTS: INTEREST ON WORKING CAPITAL LOAN EXCLUDING DIRECT EX PENDITURE RS.1 42 30 821 INTEREST ON BILLS DISCOUNTED WITH BANKS RS.1 29 5 7 771 OTHER INTEREST PAID RS. 1 29 296 INTEREST ON FIXED DEPOSITS RS. 30 21 156 INTEREST ON DIRECTORS LOANS RS. 13 82 475 ------------------- RS.3 17 21 519 =========I IN GROUND NO.4 THE ASSESSEE IS CONTESTING THAT THE AMOUNT OF RS.1 29 57 771/- PERTAINS TO IMPORT ACTIVITY OF THE ASSESSEE AND HENCE THE SAME SHOULD BE EXCLUDED FROM THE INDIRECT COST. 7.1 THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE INTEREST EXPENDITURE CITED ABOVE EXCEPT THE INTEREST ON BIL LS DISCOUNTED RELATE TO MANUFACTURING ACTIVITIES AND HENCE THERE IS NO NECE SSITY TO TREAT THEM AS PART OF INDIRECT COST FOR THE PURPOSES OF ARRIVING DEDUCTION ON TRADING EXPORTS. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS ALREADY CONSIDERED THE INTEREST ON PACKING CREDITS AMOUNTING TO RS.1 00 21 492/- AS THE DIRECT COST RELATING TO TRADING EXPORTS. WITH REGARD TO THE INTEREST PAID ON BILLS DISCOUNTED WITH BANKS AMOUNTING TO RS.1 29 57 771/- THE LEARNED A.R ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 9 OF 13 SUBMITTED THAT IT RELATES TO THE IMPORT ACTIVITY OF THE ASSESSEE AND HENCE THE SAME CANNOT BE CONSIDERED AS INDIRECT EXPENSES PERTAINING TO EXPORTS. 7.2 HOWEVER THE LEARNED DEPARTMENTAL REPRESENTATIV E SUBMITTED THAT THE IMPUGNED INTEREST EXPENDITURE OF RS.3.17 CRORES HAVE BEEN INCURRED BY THE ASSESSEE TOWARDS WORKING CAPITAL LOANS AND HENC E THE LEARNED CIT (A) HAS CORRECTLY CLASSIFIED THEM AS INDIRECT COST. WIT H REGARD TO THE INTEREST PAID ON BILLS DISCOUNTED THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IT IS NOT BORNE OUT OF THE RECORD TH AT THE SAME IS RELATED TO IMPORT ACTIVITY OF THE ASSESSEE. 7.3 WE NOTICE THAT THE LEARNED CIT (A) INCLUDED THE IMPUGNED AMOUNT OF RS.3 17 21 519/- IN THE INDIRECT COSTS WITH THE FOL LOWING OBSERVATIONS: THE APPELLANT HAD PAID TOTAL OF RS.6 64 62 329/- T OWARDS INTEREST ON VARIOUS ACCOUNTS. AS SEEN FROM THE DETA ILS FURNISHED IN PARA 5.4 AN AMOUNT OF RS.1 00 21 492/ - IS TREATED AS A DIRECT EXPENDITURE I.E. INTEREST ON PACKING C REDIT. OUT OF THE BALANCE AMOUNT THE INTEREST PAID ON TERM LOANS EXCLUSIVELY OBTAINED FOR PURCHASE OF MACHINERY WAS AT RS.2 47 19 318/-. THE BALANCE OF THE EXPENDITURE ON ACCOUNT OF INTEREST PERTAINS TO INTEREST PAID ON WORKING CA PITAL LOANS INTEREST ON BILLS DISCOUNTED AT BANKS INTEREST ON FIXED DEPOSITS OBTAINED AND INTEREST ON DIRECTORS LOANS. THESE INTERESTS ARE TO BE PROPORTIONATELY ALLOCATED TOWARDS WORKING CAPITAL REQUIREMENTS/ COST OF FUNDS UTILIZED IN TRA DING ACTIVITY ALONG WITH OTHER MISCELLANEOUS EXPENDITURE AS IT CANNOT BE EXCLUSIVELY STATED THAT NO PART OF THE AMOUNT IS UTILIZED IN TRADING ACTIVITY . TO THE EXTENT OF DIRECTLY ATTRIBUTABLE EXPENDITURE THE SAME HAS ALR EADY BEEN TAKEN INTO DIRECT COST. TO THE EXTENT OF UNRELATED INTEREST PAID ON TERM LOAN FOR PURCHASE OF MACHINERY THE SAME ST ANDS EXCLUDED. THUS THE BALANCE EXPENDITURE IS TO BE PROPORTIONATELY ALLOCATED TO THE WHOLE OF THE CONCE RN WHICH INCLUDED TRADING OF EXPORTS. THE ITEMS OF INTEREST EXPENDITURE CLASSIFIED BY LEA RNED CIT(A) AS PART OF INDIRECT EXPENSES ARE RELATABLE TO THE WORKING CA PITAL OF THE COMPANY. THE WORKING CAPITAL FUNDS ARE UTILIZED NOT ONLY FOR MANUFACTURING ACTIVITIES ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 10 OF 13 BUT ALSO FOR MEETING OUT ALL TYPES OF FINANCIAL EXP ENDITURE INCLUDING SALARIES AND OTHER ADMINISTRATIVE EXPENSES. IT IS NOT THE C ASE OF THE ASSESSEE THAT IT HAD MAINTAINED SEPARATE ESTABLISHMENT FOR CARRYING OUT THE TRADING EXPORTS. WE NOTICE THAT THE LEARNED CIT(A) HAD ALREADY EXCLU DED THE INTEREST ON MACHINERY LOANS WHICH IS DIRECTLY RELATED TO THE M ANUFACTURING ACTIVITY. HENCE WE ARE OF THE VIEW THAT THE IMPUGNED INTERES T EXPENDITURE EXCEPTING THE INTEREST PAID ON BILLS DISCOUNTED CA N BE TREATED AS PART OF INDIRECT EXPENSES. WITH REGARD TO THE INTEREST PAI D ON BILLS DISCOUNTED IT IS NOT BORNE OUT OF THE RECORD THAT THE SAME IS RELATE D TO THE IMPORT ACTIVITY OF THE ASSESSEE. HOWEVER IF THE CLAIM OF THE ASSESSEE IS PROVED TO BE CORRECT WE ARE OF THE VIEW THAT THE SAME CANNOT BE INCLUDED IN THE INDIRECT COST. SINCE THE CLAIM OF THE ASSESSEE IS NOT BORNE OUT OF THE RECORD IN THE INTEREST OF NATURAL JUSTICE WE THINK IT PROPER TO SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR MAKING NECESSARY VERIFICATION ON THE CLAIM OF THE ASSESSEE. IF THE ASSESSING OFFICER FINDS THE CLA IM OF THE ASSESSEE TO BE CORRECT THEN HE IS DIRECTED TO EXCLUDE THE SAID AM OUNT FROM THE INDIRECT COSTS. ACCORDINGLY WE AFFIRM THE ORDER OF THE LEAR NED CIT (A) ON THIS ISSUE EXCEPTING TO THE INTERESTS ON BILLS DISCOUNTED WHI CH IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. 8. IN THE GROUND NO.7 THE ASSESSEE CONTENDS THAT TH E LEARNED CIT (A) SHOULD HAVE EXCLUDED 90% OF THE NET INTEREST INCOME INSTEAD OF 90% OF THE GROSS INTEREST INCOME. THE LEARNED CIT (A) REJECTED THE SAID CLAIM OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE HAS EARNED TH E INTEREST INCOME ONLY FROM OUT OF SURPLUS FUNDS GENERATED DURING THE YEAR UNDER CONSIDERATION. 8.1 THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THIS BENCH HAS DECIDED IN MANY CASES THAT ONLY 90% OF THE NET INTE REST SHOULD BE EXCLUDED FROM THE PROFITS OF BUSINESS FOR THE PURPOSES OF DE DUCTION U /S 80HHC. HOWEVER LEARNED DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT THE ASSESSEE ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 11 OF 13 HAS FAILED TO PROVE NEXUS BETWEEN THE BORROWED FUND AND THE IMPUGNED DEPOSITS. 8.2 THE HON'BLE DELHI HIGH COURT IN THE CASE OF SHR IRAM HONDA POWER EQUIPMENTS (289 ITR 501) AND IN THE CASE OF PAWAN K UMAR JAIN (298 ITR 443) HAS HELD THAT ONLY THE NET INTEREST HAS TO BE EXCLUDED FROM THE PROFITS OF BUSINESS FOR THE PURPOSE OF SECTION 80HHC. AS ST ATED BY LEARNED AUTHORISED REPRESENTATIVE THIS BENCH IS CONSISTENT LY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT CITED ABOVE. FROM THE ORDER OF THE LEARNED CIT (A) WE NOTICE THAT THE FIRST APPELLATE AUTHORITY HA S ANALYSED THE POSSIBILITY OF USING THE FUNDS GENERATED DURING THE YEAR FOR MA KING THE IMPUGNED DEPOSITS. THUS IT IS NOT CLEARLY ESTABLISHED THAT T HE BORROWED FUNDS WERE NOT UTILIZED FOR THE SAID PURPOSE. IN ANY CASE THIS IS SUE HAS NOT BEEN EXAMINED BY THE ASSESSING OFFICER. ACCORDINGLY WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE PRESENT CLAIM OF THE ASSESSEE IN THE LIGHT OF DECISION RENDERED BY THIS BENCH ON SIMILAR ISSUE. 9. IN GROUND NUMBER 8 THE ASSESSEE IS CONTESTING T HAT THE AMOUNTS RECEIVED TOWARDS DAMAGES FOR NON FULFILLMENT OF CON TRACTS CANNOT BE TAKEN AS AN INDEPENDENT INCOME AND HENCE THE SAME NEED NO T BE EXCLUDED UNDER CLAUSE (BAA) OF EXPLANATION TO SEC. 80HHC AS THEY WERE DERIVED IN THE NORMAL COURSE OF BUSINESS. 9.1 THE LEARNED AUTHORISED REPRESENTATIVE REITERATE D THE CONTENTIONS THAT THE DAMAGES SO RECEIVED FOR NON FULFILLMENT OF CONTRACTS IS A BUSINESS INCOME DERIVED IN THE NORMAL COURSE AND HENCE THE S AME NEED NOT BE EXCLUDED FROM THE PROFITS OF BUSINESS. ON THE CONTR ARY THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SAID INCOME IS NOT RELATED TO THE EXPORT ACTIVITY OF THE ASSESSEE AND HENCE TH E LEARNED CIT (A) IS RIGHT IN EXCLUDING THE SAME. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 12 OF 13 9.2 FROM THE ORDER OF LEARNED CIT (A) WE NOTICE T HAT THE FIRST APPELLATE AUTHORITY HAS EXAMINED THE NATURE OF THE IMPUGNED R ECEIPTS AND HIS OBSERVATIONS IN THIS REGARD ARE EXTRACTED BELOW: 7.3 DAMAGES RECEIVED FOR NON-FULFILLMENT OF CONTRACTS : AS CONTENDED BY THE APPELLANT THE DAMAGES WERE REC EIVED FOR NON-FULFILLMENT OF CONTRACTS BOTH EXPORT CONTRACTS AS WELL AS LOCAL TRADE CONTRACTS. IT WAS EXPLAINED THAT IN THE OIL TRADE THERE IS FORWARD TRADE BUSINESS THAT A PARTICULAR P RICE IS FIXED FOR RAW MATERIALS AS WELL AS FOR SALE OF PRODUCTS AND A T THE DELIVERY POINT OF TIME IF THE PRICE IS UNECONOMICAL THE DI FFERENCE OF THE PRICE IS PAID IN SETTLEMENT OF THE TRADE CONTRACT. THUS THE APPELLANT HAD RECEIVED AMOUNTS TO THE EXTENT OF RS. 41 12 405/- WHEREAS IT ALSO PAID DAMAGES TO THE TUNE OF RS.21 5 6 300/- WHICH ARE INCLUDED IN SCHEDULE 4 OF THE PROFIT & LO SS ACCOUNT. IT WAS EXPLAINED THAT THESE TRANSACTIONS ARE IN THE NA TURE OF BUSINESS TRANSACTIONS AND THE RECEIPTS AND PAYMENTS ARE IN THE NATURE OF BUSINESS ONLY. 7.3.1 EVEN THOUGH THESE ARE TREATED AS DAMAGES FOR NON- FULFILLMENT OF CONTRACT GENERALLY THE TRANSACTIONS OCCUR IN THE FOLLOWING MANNER. IF A PARTICULAR SALE OF OIL PRODUC T IS TO BE SOLD IN BULK AT RS.100/- AND THE PRICE HAS GONE UP TO RS.105 AND IN ANTICIPATION THAT THE PRICE MAY GO FU RTHER UP THE COMPANY MAY PREFER TO SETTLE THE TRANSACTION AND TH E DIFFERENCE OF PRICE BETWEEN THAT DAYS SALE PRICE AND THE CONT RACTED PRICE RATHER THAN DELIVERY OF THE GOODS. IF THAT DAYS SAL E PRICE IS FOR EXAMPLE RS.106 THE AMOUNT OF RS.6 IS PAID AS DAMAG ES FOR NON-FULFILLMENT OF CONTRACT. SIMILARLY THE REVERSE WILL WORK FOR PURCHASES OF RAW MATERIALS. THE APPELLANT WOULD BE RECEIVING THE DIFFERENCE PRICE IF THE RAW MATERIAL PRICES ARE INCREASING AND THE OTHER PARTY WHO IS SELLING MAY PAY DAMAGES IN STEAD OF SUPPLYING THE GOODS AT A LOWER CONTRACTED PRICE. TH US THE APPELLANT COMPANY WAS IN RECEIPT OF BOTH DAMAGES AN D ALSO PAID DAMAGES FOR NON-FULFILLMENT OF CONTRACTS. IN V IEW OF THE NATURE OF BUSINESS UNDERTAKEN BY THE APPELLANT THE SE CONTRACTS ARE PART OF THE BUSINESS TRANSACTIONS IN THE COURSE OF BUSINESS AND I AM INCLINED TO ACCEPT THE APPELLANTS CONTENTI ON THAT THESE ARE BUSINESS RECEIPTS. THEREFORE THE ASSESSING OFF ICERS FINDING THAT THESE ARE NOT BUSINESS RECEIPTS IS NOT ACCEPTE D. HOWEVER SINCE THESE RECEIPTS HAVE NO CONNECTION WITH THE EX PORT ACTIVITY OR WITH THE MANUFACTURING ACTIVITY THESE ARE TO BE TREATED AS OTHER RECEIPTS FOR THE PURPOSE OF COMPUTATION UND ER CLAUSE (BAA) TO SUB-SECTION 4 OF SECTION 80HHC. ITA NOS.449 & 450 OF 2003 FOODS FATS & FERTILIZERS L TD TADEPALLIGUDEM PAGE 13 OF 13 ON A CAREFUL READING OF THE NATURE OF THE IMPUGNED RECEIPT IT IS NOTICED THAT THE SAID DAMAGES HAVE BEEN RECEIVED ON CLOSURE OF C ONTRACTS AND HENCE THE IMMEDIATE SOURCE OF RECEIPT IS THE CONTACT WHICH M AKES IT AN INDEPENDENT SOURCE OF INCOME THOUGH IT IS IN THE NATURE OF BUS INESS INCOME. ACCORDINGLY WE ARE OF THE VIEW THAT THE LEARNED CIT (A) IS RIGHT IN EXCLUDING THE SAME FROM THE PROFITS OF BUSINESS FOR THE PUR POSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC. 10. IN THE RESULT THE APPEAL OF THE REVENUE IS DISM ISSED AND THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR ST ATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 21/01/2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE:21-01-2011 COPY TO 1 M/S FOODS FATS & FERTILIZERS LIMITED TANUKU ROAD TADEPALLIGUDEM 534101 2 THE DY.COMMISSIONER OF INCOME TAX CIRCLE-1 ELURU 3 4. THE CIT 1 VISAKHAPATNAM THE CIT(A)-I VISAKHAPATNAM 5 THE DR ITAT VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM