TaxTMI 
TaxTMI 
2008 (7) TMI 1065
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of calculation of deduction under Section 80HHC. The assessing officer in his order on p. 5 has stated as under: The plea of the assessee that FDRs were made out of the amount of the export realizations is not tenable since the source of the deposits does not change the nature of the income. 3. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 4. We have heard the rival contentions and perused the facts of the case. The assessee is engaged in the manufacture and export business of made ups and home furnishings. The assessee is enjoying the facilities from the bank and during the year has incurred interest expenditure amounting to Rs. 30,02,765. The assessee has made the FDRs on which interest income of Rs. 2,39,976 has been earned. The net expenditure of Rs. 27,62,789 was claimed as interest expenditure i.e. the assessee has treated Rs. 2,39,276 as business income. The arguments of both the parties were taken on record. On identical issues, this Bench has been taking the consistent decisions where the income earned as interest on FDRs has to he treated as income from other sources and not income from business and the interest expend....
X X X X Extracts X X X X
X X X X Extracts X X X X
....drawn towards Section 28(iiia), (iiic) and (iiid): (iiia) Profit on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports and Exports (Control) Act, 1947 (18 of 1947); (iiib) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India. (iiic) Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971. (iiid) Any profit on the transfer of the Duty Entitlements Pass Books Scheme, being the Duty Remission Scheme under the Export and Import Policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992). It may also be observed that Clauses (iiia) and (iiid) speak of profit and whereas Clauses (iiib) and (iiic) provide for gross receipts. DEPB entitlements are given to supplement the input cost of exports. One way could be to ascertain the entitlement based on actual cost of each exporter. However, instead of this cumbersome procedure, the Government has decided to allow DEPB on a fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wing two judgments: 1. Hero Exports v. CIT The Hon'ble Supreme Court of India accepted the "Principal of Attribution" under Section 80HHC for excluding from the indirect cost the expenses incurred for earning commission and other such incomes. 2. Surendra Engineering Corporation v. Asstt. CIT (2003) 78 TTJ(Mumbai) 347 The Hon'ble Special Bench held that expenses attributable to earning of commission and other such incomes have to be excluded from the indirect cost to arrive at the profit earned from export of trading goods. 10. The learned Authorised Representative further argued that the concept of imbibed cost is not foreign to Income Tax Act, 1961. Similar contention of cost being nil was raised by the revenue for bonus shares on the plea that nothing was paid for acquiring bonus shares. This issue travelled upto the Hon'ble Supreme Court of India in the case of CIT v. Dalmia Investment Co. Ltd. The Hon'ble. Supreme Court of India discussed the issue at great length and held that bonus shares cannot be said to be gift. Therefore, the Hon'ble Supreme Court of India held that the cost of bonus shares cannot be nil and has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vailable and presentation of the expenses without off setting the grant may therefore, be misleading. (iv) Tax treatment for, importers cannot be different for non-importers If entitlements are used for duty free imports, no part of the profit resulting from savings in import duty is taxed. Therefore, same thing done by non-importers in other way cannot put them in disadvantageous position under the Income Tax Act, 1961. (v) Since in the case of the assessee, DEPB entitlements of the face value of Rs. 38,28,340 were sold for Rs. 38.43,046 (both in aggregate) which resulted into profit of Rs. 14,706. Only this profit can be excluded from the working of the deduction under Section 80HHC. 12. The learned Authorised Representative prayed that in view of the above, the treatment given by the lower authorities may be held illegal. 13. The learned departmental Representative on the other hand relied upon the orders of the authorities below. 14. We have heard the rival contentions and perused the facts of the case. We are convinced with the arguments of learned Counsel for the assessee Shri Rajeev Sogani, chartered accountant that Section 28(iiia), 28(ii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of taxing one receipt, i.e., if the assessee utilizes the said entitlements for imports, no tax is levied on the part of profit which has resulted from the savings in the import duty whereas if it is not utilized and sold in the market, the same is taxed. Therefore, such cost cannot become the part of the profit. Essentially it has to be reduced from the sale consideration. 17. The learned Authorised Representative has made the convincing arguments that Income Tax Act does not specify the cost of DEPB. Mr. Rajeev Sogani, chartered accountant invited our attention to the amendment under Section 55(iiia) of the Act where it has been provided that cost of bonus share has to be taken as nil but there is no such provision in the Act with regard to the DEPB. 18. The arguments of learned Authorised Representative with regard to the cost of DEPB entitlements are acceptable that the various Government, levies included in the inputs are the cost of DEPB although debited to cost of inputs. The cost is imbibed in the higher purchase price of input. DEPB entitlements are given to supplement the input cost of exports which is a fixed percentage of the export which differs from the differen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....report that the assessee maintains the stock register but the stock register was never produced during the whole proceedings. (5) The assessee could not reconcile the difference in closing balance of M/s Marudhara International shown in its books of account and shown in the books-of M/s Marudhara International. Hence, it is clear that the books of account of the assessee are not complete and correct and therefore, they are rejected under Section 145(3) because the true profits cannot be ascertained from the books of the assessee. 21. The learned Commissioner (Appeals) confirmed the applicability of Section 145(3) of the Act vide para 2.3(i) of the Act. 22. The assessing officer at page 3 of his order: for estimating the income observed as under: The following concerns have shown the GP rate in assessment year 2003-04 as follows: S.N. Name of the assessee Turnover GP rate 1. Garment Craft India (P) Ltd. 2.33 crores 23.62% 2. Somani Fabric (P) Ltd. 3.56 crores 25.26% 3. M/s J.C. Fashions 7.02 crores 23.72% The assessee is showing less profits in comparison to above concerns which are also engaged in the export of similar items. Looki....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proceedings. Therefore, in the circumstances and facts of the present case, past results of the assessee are the best guide. The assessee has declared GP rate of 20.46 per cent in the immediately preceding year whereas during the impugned year, the assessee has declared better GP rate of 20.75 per cent. In view of decision of jurisdictional High Court in the case of CIT v. Gotan Lime Khanij Udhyog, even if the rejection of books of account have been upheld, in the circumstances of the present case, no addition is called for. The learned Commissioner (Appeals) has not given any basis for making the application of GP rate of 21.26 per cent and has ignored the past results declared by the assessee. Therefore, the order of the learned Commissioner (Appeals) for sustaining the addition is reversed. Thus, ground No. 1 of the assessee is dismissed and ground No. 2 of the assessee is allowed and solitary ground of the revenue is dismissed. Ground No. 3 : The learned Commissioner (Appeals) has erred in upholding the action of the assessing officer in not considering the interest income of Rs. 2,85,272 for. the purpose of calculating the deduction under Section 80HHC. 25. The brief fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have reversed the order of the learned Commissioner (Appeals) and have directed the assessing officer to allow the claim of the assessee to tax profit on the transfer of the DEPB Scheme under Section 28(iiid) of the Act. Since the issue in the present appeal is identical to the issue in assessees own appeal for the assessment year 2002-03, supra, therefore, our order in the said appeal will be applicable in the present appeal. Therefore, the assessing officer is directed to allow the claim of the assessee. Thus, ground No. 4 of the assessee is allowed. 30. The ground No. 5 of the assessee is general in nature which needs no adjudication by us. ITA No, 370/Jp/2008 Assessment year 2004-05 Ground No. 1 : The learned Commissioner (Appeals) has erred in confirming the rejection of books of account of the assessee. Ground No. 2 ; The learned Commissioner (Appeals) has erred in confirming the trading addition of Rs. 16,50,585.. 31. The brief facts of the case are that the assessee continues the same business as in the preceding year. The assessing officer has rejected the books of account by invoking the provisions of Section 145(3) of the Act since the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supra). Therefore, the order of the learned Commissioner (Appeals)) for sustaining the trading addition is reversed. Thus, ground No. 1 of. the assessee is dismissed and ground No. 2 of the assessee is allowed. Ground No. 3 : The learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in excluding from the computation of deduction under Section 80HHC, the alleged profit of Rs. 1,40,56,320 on account of transfer of DEPB. 33.The brief facts of the case as per page 3 of assessing officers order are as under: I have gone through the contentions of the learned Authorised Representative of the assessee and found them unacceptable. DEPB license carries no face value like a bond and it is just entitlement of import of goods to the extent of specified rate of export proceeds. The adjustment is done by book entries and an exporter has option to transfer its credit balance to any other party for some consideration. What the learned Authorised Representative of the assessee wants to say is that he had credit balance of Rs. 1,54,25,724 and sold these licenses for Rs. 1,40,56,320 and incurred losses. The contention is hypothetical and calculation....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 61,85,501 on the basis that the loan is diverted by the assessee by way of investment and advancement of loans to various persons which are not connected with his business activities. The learned Commissioner (Appeals) vide para 3.3 at page 6 observed as under: I have considered facts of the case and arguments taken by Shri Sogani quite carefully. On this issue, Tribunal, Jaipur Bench, in the case of Arpit Marbles replying upon Rajasthan High Court judgment in the case of Indian Shaving Products Ltd. v. CIT has held that interest payable on borrowed capital was not allowable in a case where interest-free loan was advanced. Similarly, Hon'ble Madras High Court in the case of K. Somasundaram & Bros. v. CIT has held that where there is intermixing of the funds, the interest-free advance is held to be out of interest-bearing funds and thus interest on interest-free loan is not deductible. In this respect, Hon'ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P) Ltd. has held that if money has not been advanced to directors, it would have been available to the assessee for its business and to that extent it may not have been necessary to borrow fun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has observed as under: It is agreed that the proprietor has all the rights to withdraw his capital, then who prevented the proprietor to withdraw his capital and make interest-free loans and investments for non-business purposes. Thus the assessing officer would not have disallowed any interest if the assessee would have withdrawn the capital. The assessing officer has failed to understand the accounting treatment when the case is of a proprietorship concern. In such a case, proprietor has both the options i.e. either he can withdraw the capital and invest for non-business purposes or alternatively, he can make the investments through his business books. The impact of both remains the same so far as income-tax is concerned. The assessing officer has observed some advances having closing balance amounting to Rs. 1,33,50,800 and investments of Rs. 83,82,000 (47,90,000 + 35,92,000) which are not for business purposes. Since various advances and investments mentioned by the assessing officer are less than the opening capital, therefore, had the investments been made by debiting the capital account, the same would not have appeared in the balance sheet. After withdrawing all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ind that the respondent assessee had sufficient amount of money towards share capital, surplus and reserve as also interest-free advances by two companies which was about Rs. 1,60,00,000.. Thus, the interest-free advance made to the sister concern, namely, M/s Prem Engineering Works was fully covered from the interest-free advances which was share capital, surplus and reserve with the respondent assessee had. This Court in the case of CIT v. Radico Khaitan Ltd. had considered this aspect and has held that where the amount of any interest-free loan is sufficiently covered by the non-interest-bearing funds available with the assessee, the question of disallowance of interest on borrowed funds does not arise. It is also not the case of revenue that any amount borrowed from the bank on which the liability for payment of interest-free advance was there with the respondent assessee, had not utilized for the purpose of business. (3) CIT v. Britannia Industries Ltd. In this case, Hon'ble Court held that when the assessee had both borrowed funds as well as own funds there would be a presumption that the amount was made out of the Own funds of the assessee and not from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee withdrawn the surplus capital and then the same would have been invested and declared in the personal balance sheet, there would not have been any allegation on the assessee for using the interest-bearing funds of the business. This vital fact has been ignored by both the authorities below. The assessee is having the surplus capital and any investment made out of own capital of the assessee, cannot be a subject for disallowance of interest paid to the banks. The cases relied upon by the authorities below are no help to the Revenue as submitted by the learned Authorised Representative. The cases relied upon by Mr. Rajeev Sogani in the case of Radico Khaitan Ltd., Prem Heavy Engineering Works (P) Ltd., Britannia Industries Ltd., supra support our views and therefore, no disallowance on account of interest can be made. Therefore, the disallowance confirmed by the learned Commissioner (Appeals) is directed to be deleted. Thus, ground No. 4 of the assessee is allowed. Ground No. 5 : The learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in treating the interest income amounting to Rs. 4,94,018 as income from other sources and excluding the....