2014 (3) TMI 327 - AT - Income Tax

Interest Income from TDRs/FDRs for Export Business Qualifies as Business Income under Section 80HHC

The tribunal concluded that interest income from TDRs/FDRs kept as margin money for bank guarantees in the course of export business should be considered ... Entitlement for deduction u/s 80HHC of the Act – Interest receipt out of export business – Held that:- If the interest income is earned from the TDR/FDR deposits kept as margin money towards bank guarantee in the course of export business, the same is to be considered as income from business – also, if the interest income is received from the deposits made by the assessee which are inextricably linked to the business of the assessee, such interest income cannot be treated as income from other sources - 90% of the net interest which has been assessed under the head 'income from business' of the assessee has to be deducted in terms of Explanation (baa) to section 80HHC for determining the profit of business – Relying upon ACG Associates Capsules Pvt. Ltd. Vs. CIT [2012 (2) TMI 101 - SUPREME COURT OF INDIA] - as such the Explanation (baa) to section 80HHC applicable to this part of income –thus, the AO is directed to recompute deduction u/s 80HHC – Decided in favour of Assessee. Computation of deduction u/s 80HHC of the Act – Interest income to be part of total turnover or not – Held that:- The interest income is to be considered as business income subject to application of Explanation (baa) to section 80HHC – thus, the AO is directed to recompute deduction u/s 80HHC of the Act – Decided in favour of Assessee. Computation of deduction u/s 80HHC of the Act – conversion charges - Held that:- The decision in ACIT Vs. Bio-tech Medicals, Hyderabad [2008 (3) TMI 365 - ITAT HYDERABAD-B ] followed - conversion charges to be considered as derived from the industrial undertaking of the assessee - processing charges received by the assessee being an independent income, 90% had to be reduced from this income but the same being an important component of business profits, had to be included in the total turnover as per the formula given in 80HHC of the Act –thus, the AO is directed to consider the conversion charges as an independent income and exclude 90% thereof from the gross total income in terms of Explanation (baa) to section 80HHC of the Act, so as to arrive at business profits – Decided partly in favour of Assessee. Exchange fluctuation – If it is received in the end of the FY corresponding to the sales effected during the FY on export of exports, it should be considered as business income of the assessee, which is an integral part of the export and it cannot be separated from the export proceeds simply on the ground that increase in the rate subsequent to sale but prior to realization – the decision in Bench of Tribunal, Bombay in the case of ACIT Vs. Prakash I. Shah [2008 (8) TMI 387 - ITAT BOMBAY-K ] followed – it should be considered part of the total turnover of the assessee Decided in favour of Assessee. Insurance claim - If it is received on the trading assets, the same is to be considered as part of the turnover of the assessee - On the other hand, if it is received on the fixed assets, it cannot form part of the turnover of the assessee – thus, the AO is directed to verify the claim – Decided in favour of Assessee. Write off of credit balances – If it is having direct link with the business operation of the assessee, the same is to be considered as income from business - Before the AO, nothing has been brought on record about the nature of credit balance – thus, the matter is remitted back to the AO to verify whether it has nexus with the business operation of the assessee and if it has already taken into computation of income under the head 'business income', the claim of assessee has to be allowed so as to grant deduction u/s 80HHC of the Act. Nature of Consultation fee paid – Capital OR Revenue – Held that:- Though the claim of ₹ 2.00 lakh is relevant to AY under consideration, however, bill issued by Sri Ganesh from M/s Q Pharma Consulting India shows that only ₹ 1 lakh is relating to AY under consideration and balance ₹ 1 lakh not deductible during the year consideration - The CIT(A) allowed the amount relevant to AY under consideration – thus, there was no infirmity in the order of the CIT(A) – Decided against Assessee. Business Receipt u/s 28(iiib) of the Act - Deductibility of Modvat credit from raw material consumption account- Held that:- Excise duty refund does not fall u/s 28(iiib) of the Act as it related to the Modvat credits returned from the excise duty payments on exports and it was later on refunded – thus, it is neither an incentive nor a rebate and the central excise duty what has paid by the assessee - there is no question of excluding 90% receipts by invoking Explanation (baa) to section 80HHC of the – thus, the order of the CIT(A) set aside – Decided in favour of Assessee. Disallowance of interest – Advance paid – Held that:- The decision in S.A. Builders Ltd. Vs. CIT(A) and Another, [2006 (12) TMI 82 - SUPREME COURT ] as long as the interest free loans are given to sister concerns as a measure of commercial expediency, disallowance cannot be resorted only on the ground that the loans have been utilized by the sister concerns for its business purposes - What is to be actually seen is commercial expediency of having advanced the loans and it is immaterial whether or not the loans so advanced is used for the purposes of the business of the assessee or for the purposes of business of the assessee's sister concerns – thus, the order of the CIT(A) set aside – Decided in favour of Assessee. Disallowance of interest – Held that:- The investments made by the assessee are not for the purpose of the assessee's business – thus, lower authorities have justified in disallowing the interest on the investments made by the assessee – the order of the CIT(A) upheld – Decided against Assessee. Disallowance of deduction u/s 80 HHC of the Act – DEPB benefits – Held that:- The assessee having satisfied conditions laid down therein the rate of draw back credit attributable to the Customs Duty was higher than the rate of credit allowable under the DEPB Scheme – thus, the AO is directed to recompute the deduction u/s 80 HHC of the Act – Decided in favour of Assessee. Addition on account of excise duty on closing stock u/s 43B of the Act - Held that:- The decision in ACIT Vs. Torrent Cables Ltd. [2012 (11) TMI 190 - SUPREME COURT] followed - the assessee followed the net method for valuing the closing stock and included excise duty at the time of removal of goods - the excise duty is to be excluded at the time of valuing closing stock at the end of the accounting period – thus, the order of the CIT(A) upheld – Decided against Revenue. Issues Involved:1. Eligibility for deduction under Section 80HHC of the Income Tax Act.2. Treatment of interest income for deduction purposes.3. Inclusion of various incomes in the business profits for Section 80HHC.4. Disallowance of interest on advances and investments.5. Treatment of Modvat credit.6. Deduction under Section 80IB.7. Levy of interest under Sections 234B and 234C of the Act.8. Exclusion of sales tax and excise duty from total turnover.9. Legislative intention behind Section 145A.10. Deduction for DEPB benefits under Section 80HHC.Detailed Analysis:1. Eligibility for Deduction under Section 80HHC:The core issue is whether certain incomes qualify for deduction under Section 80HHC. The tribunal concluded that interest income from TDRs/FDRs kept as margin money for bank guarantees in the course of export business should be considered business income and not income from other sources. This aligns with the Supreme Court judgment in ACG Associates Capsules Pvt. Ltd. vs. CIT.2. Treatment of Interest Income:The tribunal addressed whether interest income should be considered business income or income from other sources. It was held that if interest income is directly linked to the business operations, it should be treated as business income. Consequently, 90% of the net interest assessed under the head 'income from business' must be deducted per Explanation (baa) to Section 80HHC.3. Inclusion of Various Incomes in Business Profits:The tribunal examined the inclusion of conversion charges, miscellaneous income, exchange fluctuation, and interest on electricity deposits in business profits for Section 80HHC. Conversion charges were considered independent income, and 90% had to be excluded from gross total income. Exchange fluctuation was treated as business income if related to sales effected during the financial year. Insurance claims on trading assets were included in turnover, while those on fixed assets were not. Interest on electricity deposits was considered 'income from other sources' based on the Supreme Court judgment in Pandian Chemicals.4. Disallowance of Interest on Advances and Investments:The tribunal evaluated the disallowance of interest on advances to M/s Nextage Broadband Ltd. and investments in other companies. It was concluded that if the assessee had sufficient reserves and capital, it could not be presumed that borrowed funds were diverted. This follows the Supreme Court's ruling in S.A. Builders Ltd. vs. CIT(A).5. Treatment of Modvat Credit:The tribunal addressed whether Modvat credit should be considered a business receipt under Section 28(iiib) for computing deduction under Section 80HHC. It was held that excise rebate does not fall under Section 28(iiib) as it relates to Modvat credits returned from excise duty payments on exports and refunded later. Thus, 90% of these receipts should not be excluded under Explanation (baa) to Section 80HHC.6. Deduction under Section 80IB:The tribunal ruled that deduction under Section 80IB cannot be deducted from the profit of business eligible for deduction under Section 80HHC. This aligns with judgments from various High Courts, including Associated Capsules Pvt. Ltd. vs. DCIT and CIT vs. Milipore India Pvt. Ltd.7. Levy of Interest under Sections 234B and 234C:The tribunal noted that the levy of interest under Sections 234B and 234C is consequential. The Assessing Officer was directed to recompute the interest while passing the consequential order.8. Exclusion of Sales Tax and Excise Duty from Total Turnover:The tribunal upheld that sales tax and excise duty should be excluded from the total turnover for computing deduction under Section 80HHC. This follows the Supreme Court rulings in CIT vs. Lakshmi Machine Works and CIT vs. Catapharma (India) P. Ltd.9. Legislative Intention behind Section 145A:The tribunal addressed the inclusion of excise duty in the valuation of closing stock. It was held that excise duty should be included in the valuation, but corresponding deductions under Section 43B should be allowed if paid within the due date for filing the return. This aligns with the Supreme Court's decision in ACIT vs. Torrent Cables Ltd.10. Deduction for DEPB Benefits under Section 80HHC:The tribunal examined the eligibility for deduction under Section 80HHC for DEPB benefits. It was concluded that the assessee must satisfy the conditions stipulated in the third proviso read with the fifth proviso to sub-section (3) of Section 80HHC. The Assessing Officer was directed to recompute the deduction accordingly.Conclusion:The tribunal's detailed analysis provided clarity on various aspects of deductions under Section 80HHC, treatment of interest income, inclusion of different incomes in business profits, and the legislative intent behind Section 145A. The appeals were partly allowed for statistical purposes, and the revenue's appeals were dismissed.