M/s. THE NEXT DIAMOND CO., MUMBAI v. DY CIT - 16(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I : MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI B. RAMAKO TAIAH (AM) I TA NO.6994/MUM/2008 ASSESSMENT YEAR :2004-05 M/S. THE NEXT DIAMOND CO. 519 PRASAD CHAMBERS OPERA HOUSE MUMBAI-400 004. ..( APPELLANT ) P.A. NO. (AAAFT 0806 F) VS. DY. COMMISSIONER OF INCOME TAX -16(3) MATRU MANDIR TARDEO MUMBAI. ..( RESPONDENT ) APPELLANT BY : SHRI VIJAY KUMAR S. BIYANI RESPONDENT BY : SHRI AJ AY KUMAR SRIVASTAVA O R D E R PER D.K. AGARWAL (JM). THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 13.8.2008 PASSED BY THE LD.CIT(A) FOR THE ASSESSMENT YEAR 2004-05. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE F IRM IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF DIAMONDS. THE RETURN WAS FILED DECLARING TOTAL INCOME OF RS.32 8 5 945/-. DURING THE COURSE OF ASSESSMENT IT WAS OBSERVED BY THE AO THAT TH E ASSESSEE HAS DEBITED INTEREST OF RS.68 37 259 TO THE P&L A/C. TH E SAID INTEREST ITA NO.6994/M/08 A.Y:04-05 2 IS AFTER NETTING OFF THE INTEREST RECEIVED OF RS.13 05 940/- FROM THE FIXED DEPOSITS KEPT WITH THE BANK. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE INTEREST RECEIVED ON FDS ETC. HAS BEEN REDU CED FROM INTEREST PAID AND WHY THE SAME BE NOT CONSIDERED AS INCOM E FROM OTHER SOURCES. THE AO AFTER CONSIDERING THE ASSESSEES SUBMI SSION THAT DURING THE YEAR THE ASSESSEE HAS RECEIVED FD INTERE ST OF RS.13 05 940/- WHICH HAS BEEN ADJUSTED AGAINST THE PAYM ENT OF INTEREST AND THE NET INTEREST OF RS.68 37 259/- IS DEBI TED TO THE P&L A/C. WAS OF THE VIEW THAT IN VIEW OF THE VARIOUS DECISI ON CITED IN THE ASSESSMENT ORDER THE INTEREST OF RS.13 05 940/- IS INCOME FROM OTHER SOURCES NOT ELIGIBLE FOR DEDUCTION U/S.80 HHC OF THE ACT AN D ACCORDINGLY COMPLETED THE ASSESSMENT AT AN INCOME OF RS.36 1 2 290/- VIDE ORDER DATED 12.9.2006 PASSED U/S.143(3) OF THE I NCOME TAX ACT 1961(THE ACT). ON APPEAL THE LD. CIT(A) WHILE OBSER VING THAT THE INTEREST INCOME OF RS.13 05 940/- HAS BEEN EARNED BECAUSE THE APPELLANT WAS UNDER THE OBLIGATION TO KEEP MARGIN MO NEY WITH THE BANK FOR EXPORT PURPOSES TREATED THE INTEREST INCOME AS BUSINESS INCOME INSTEAD OF INCOME FROM OTHER SOURCES. HOWEVER IN VIEW OF THE DECISION IN CHINNA PANDI 283 ITR 289 (MAD.) AND RANI PALIWAL 268 ITR 220(P&H) HE HELD THAT NO NETTING OF INTEREST IS PERMISSI BLE AND ACCORDINGLY DIRECTED THE AO TO TREAT THIS INCOME AS BUSIN ESS INCOME AND REDUCE 90% OF THIS INTEREST AS PER EXPLANATION (BA A) TO SECTION ITA NO.6994/M/08 A.Y:04-05 3 80-HHC WHILE WORKING OUT ADJUSTED PROFITS AND ACCORDINGL Y PARTLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE ASSESSEE IS IN APPEAL BEFORE US TAKING FOLLOWING SOLE GROUND OF APPE AL :- THE LD. CIT(A) HAS ERRED IN REDUCING 90% OF THE GROSS INTEREST OF RS.13 05 940/- RECEIVED ON BANK F DS KEPT AS MARGIN MONEY AS PER EXPLANATION(BAA) TO SEC TION 80-HHC WHILE WORKING OUT THE ADJUSTED PROFITS INSTEA D OF ALLOWING NETTING OF SUCH INTEREST AGAINST INTEREST PAID ON BANK BORROWING. 4. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSE SSEE WHILE RELYING ON THE SAME SUBMISSIONS AS SUBMITTED BEFORE THE L D. CIT(A) FURTHER SUBMITS THAT IN VIEW OF THE CONSISTENT VIEW OF T HE TRIBUNAL THE NETTING OF INTEREST BE ALLOWED TO THE ASSESSEE. 5. ON THE OTHER HAND THE LD. DR SUPPORTS THE ORDER OF THE AO AND LD. CIT(A). 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RI VAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THERE IS NO DISPUTE THAT THE LD. CIT(A) HAS TREATED THE INTEREST I NCOME UNDER THE HEAD INCOME FROM BUSINESS AND AGAINST THE SAID FINDING O F THE LD. CIT(A) THE REVENUE IS NOT IN APPEAL BEFORE US. HOWEVER THE LD. CIT(A) HAS NOT ALLOWED NETTING OF INTEREST IN VIEW OF THE DE CISION IN CHINNA PANDI (2006)283 ITR 289 (MAD.) AND RANI PALIWAL (20 04)268 ITR ITA NO.6994/M/08 A.Y:04-05 4 220(P&H). THERE IS NO SUCH DECISION REPORTED IN (2006) 2 83 ITR 289(MAD.). WITH REGARD TO THE DECISION IN RANI PALI WAL VS. CIT (2004) 268 ITR 220 (P&H) WE FIND THAT IT HAS BEEN HELD BY TH EIR LORDSHIPS THAT WHILE WORKING OUT RELIEF U/S.80-HHC THE AMOUNT OF INTEREST PAID BY THE ASSESSEE COULD NOT BE DEDUCTED FROM THE GROSS INTERE ST RECEIVED BY THE ASSESSEE . HOWEVER THERE WAS NO ISSUE OF NEXUS OF INTEREST RECEIVED ON THE FDS THEREFORE THE DECISION R ELIED ON BY THE LD. CIT(A) IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. SINCE THE LD. CIT(A) HAS CLEARLY HELD THAT THE INTEREST INCOME OF RS.13 05 940/- HAS BEEN EARNED BECAUSE THE APP ELLANT WAS UNDER OBLIGATION TO KEEP MARGIN MONEY WITH THE BANK FOR EXPORT PURPOSES WE ARE OF THE VIEW THAT NEXUS HAS BEEN ESTABLI SHED BY THE ASSESSEE. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISIO N OF THE SPECIAL BENCH OF THE TRIBUNAL IN LALSONS ENTERPRISES VS. D CIT (2004) 89 ITD 25 (DEL.)(SB) DIRECT THE AO TO ALLOW THE NET TING OF INTEREST AND RECOMPUTE THE DEDUCTION UNDER SECTION 80-HHC ACCORDINGLY. THE GROUND TAKEN BY THE ASSESSEE IS THEREFORE ALLOWED. 7. IN THE RESULT ASSESSEES APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4.3.2010. SD/- SD/- ( B. RAMAKOTAIAH ) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUD ICIAL MEMBER MUMBAI DATED: 4.3.2010. JV. ITA NO.6994/M/08 A.Y:04-05 5 COPY TO: THE APPELLANT THE RESPONDENT THE CIT CONCERNED MUMBAI THE CIT(A) CONCERNED MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR ITAT MUMBAI. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 10.2.10 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 10.2.10 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 4.3.10 SR.PS/PS 7. FILE SENT TO THE BENCH CLERK 5.3.10 SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER