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2011 DIGILAW 913 (KAR)

Commissioner of Income Tax v. Buhler India Ltd.

2011-09-14

N.KUMAR, RAVI MALIMATH

body2011
JUDGMENT N. Kumar , J.—This appeal was admitted to consider the following substantial questions of law:- (1) Whether the appellate authorities were correct in holding that for the purpose of computation deduction under Section 80-IA of the Act interest income earned by the assessee after deducting interest payments on borrowed funds should be taken into account despite the fact that only profits and gains from an industrial undertaking which manufactures articles was only allowable as per the said section? (2) Whether the appellate authoritiwere correct in holding that the deduction under Section 35-D of the Act is allowable despite the assessee not satisfying that an expenditure incurred before the commencement of the business or after the commencement of business in connection with the expansion of industrial undertaking or in connection with the setting up of a new industrial unit, as contemplated under Section 35D of the Act had not been complied with? In so far as the first substantial question of law is concerned, a Division Bench of this Court in the case of CIT v. Gokuldas Exports [IT Appeal No. 25 (Kar.) of 2003] and Connected Matters had an occasion to consider the very same question. By its order dated 9.7.2008 following the judgment of the Delhi High Court in the case of Rishi Dev Batra Vs. Dr. (Mrs.) Anup Suri, (2007) 289 ITR 475 Delhi held the aforesaid substantial question of law in favour of the assessee and against the revenue. In this context, it is useful to refer to the law expounded by the Delhi High in the aforesaid case which is as under: - 26. The idea of Section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the profit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that: is expenditure incurred on earning interest, which does not form part of the profit at all. This could not have been the intention of the Legislature. Explanation (baa) is relatable only to clause (a) of Section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. This could not have been the intention of the Legislature. Explanation (baa) is relatable only to clause (a) of Section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. Hence, the word "interest" in clause (baa) to the Explanation in Section 80HHC is indicative of "net interest", i.e. gross interest less the expenditure incurred by the assessee in earning such interest. To summarise the conclusions: (i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports, (ii) In the specific context of clause (baa) of the Explanation to Section 80HHC, while determining the "profits of the business", the Assessing Officer has to undertake a two step exercise in the following sequence. He has to first "compute" the profits of the business under the head "Profits and gains of business or profession". In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of Sections 28 to 44 thereof. (iii) In arriving at the profits of the business by the above method the Assessing Officer will exclude all such incomes which partake of the character of "income from other sources" which in any event are treated under sections 56 & 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC(iv). Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and, therefore has to necessarily be treated as income from other sources and not business income, (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business income, (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head "Profits and gains of business or profession" the following sums in order to arrive at the "profits of the business" for the purposes of section 80HHC(3): (a) 90 percent of any sum referred, to in clauses (iiia), (iiib) and (iiic) and section 28, i.e., export Incentives: (b) 90 percent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India (viii) The word "interest' in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e., gross interest as reduced, by expenditure incurred for earning such interest. (ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. (ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit to draw an analogy from section 37 will require to be shown by the assessee for application of the netting principle". In para 36 of Gokuldas Exports case (supra), this Court, held as under : - 36. In the light of the foregoing discussion, we are of the considered opinion that sheet anchor to the facts of this case is the Delhi High Court judgment in the matter of Shri Ram Honda Power Equip (supra). We say so as that was the case, wherein the direct question posed in this appeal was under consideration and has been answered as such. The reasoning and interpretation employed, therein also appears to be reasonable and plausible. 2. In the light of the aforesaid judgment, as the first substantial question of law involved in this appeal is identical. It is answered in favour of the assessee and against the revenue. 3. In so far as the second substantial question of law is concerned, the claim of the assessee was negatived by the assessing authority relying on the judgment of the Apex Court in the case of Punjab State Industrial Development Corporation Ltd., Chandigarh Vs. Commissioner of Income Tax, Patiala, (1997) 225 ITR 792 SC where it was held that the payment made to the Registrar of Companies is to be treated as a capital expenditure. 4. There is no quarrel with the said legal position. In the instant case deduction was not claimed on the ground that it is a revenue expenditure. The deduction was claimed on the ground that Section 35D provides for amortization of preliminary expenses in respect of fees paid to the Registrar of Companies and expenditure incurred towards public subscription of shares. Once the condition of Section 35D is fulfilled, the assessee is entitled to the deduction. That is precisely what, the Tribunal has held. The deduction was claimed on the ground that Section 35D provides for amortization of preliminary expenses in respect of fees paid to the Registrar of Companies and expenditure incurred towards public subscription of shares. Once the condition of Section 35D is fulfilled, the assessee is entitled to the deduction. That is precisely what, the Tribunal has held. We do not see any error in the finding of the Tribunal. For the aforesaid reason, the second substantial question of law framed is also answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed.