These are cross-appeals filed by the assessee and the revenue against the order of the CIT(A), dated 5-12-1996, for the assessment year 1993-94 in the matter of the order passed by the assessing officer under section 143(3) of Income Tax Act, and an appeal filed by the revenue against the order of the CIT(A), dated 18-12-1996, for the assessment year 1992-93 in the matter of order by passed by the assessing officer under section 250 to give appeal effeet of the order of CIT(A) dated 2-1-1996.
As all the appeals have been heard together, for the sake of convenience, we dispose of all these appeals by this consolidated order.
The only grievance of the revenue in the assessment year 1992-93 relates to the CIT(A)'s action for directing the assessing officer not to exclude 90 per cent of the excise duty refund from profit of business, for calculation of deduction under section 80HHC.We have heard the rival contentions and found from the record that while giving appeal effect of the order of CIT(A), dated 2-1-1996, the assessing officer passed the order under section 250 and excluded 90 per cent of excise refund as per Explanation. (baa) below section 80HHC(4B), from the business profit of the assessee for computing the deduction under section 80HHC of the Income Tax Act. However, in the original assessment framed on 15-3-1995, the assessing officer had excluded a sum of Rs. 65,74,457 from the income eligible for deduction under section 80HHC on the plea that it represented income from other sources. This sum of Rs. 65,74,457 was also inclusive of excise refund of Rs. 59,66,891. This excise refund represented the excise duty paid on the goods purchased for export. As there was no excise duty on the export items, the excise amount got refunded and, therefore, it was shown as income in the P&L a/c. In an appeal filed by the assessee for treating such excise refund as income from other sources, the matter was restored by the CIT(A) to the file of assessing officer for considering the matter afresh after verification of books of account and accounts of other parties from whom goods were purchased. The assessing officer while giving appeal effect to this direction of the CIT(A), observed as under: "It is evident from such material placed on record that the excise refunds have been received on rebate out of excise already paid on the goods which were subsequently exported. In view of the same, such excise refunds totalling Rs. 59,66,891 shall not be included in other income." In view of above observation the assessing officer held 'that the excise refund should not be excluded from the profit of the business as representing income from other sources. However, at the same time, he reduced the profit of the business by 90 per cent of the amount of excise refund in terms of Explanation (baa) to section 80HHC(4B), without giving any reason for the same.
By the impugned order, the CIT(A) directed for not reducing 90 per cent of such excise refund from the business profit, as per the Expln. (baa) to section 80HHC(4B) by observing that it does not represent a receipt of the nature similar to the brokerage, commission, interest, rent or charges, as mentioned in Expln. (baa). The CIT(A) also observed that if the amount of excise duty refund is to be excluded from the profit of the business, the corresponding excise duty paid should be added back as representing no expenditure at all.
We have considered the rival contentions and found from the record that profit of the assessee's business did not include the excise duty refund. As the assessee was not liable to pay excise duty on the goods which were exported, and he was only required to deposit the excise duty, at the time of purchases pending export of the same. As and when the export was materialised, the amount of corresponding excise duty deposited earlier was refunded to the assessee- company. In case of an exporter having facility of bounded warehouse, is not required at all to deposit excise duty in the first instance and then receive refund of the same. If the assessee was having bounded warehouse facility, these payments and refunds of excise duty would not have taken place. As and when such excise duty was paid by the assessee as a temporary measure, the amount was debited and similarly, on refund of such excise duty, the same was credited to the books of account. Thus, we found that alleged amount of excise duty either paid or refunded did not affect the business profits of the assessee at all and, therefore, there is no reason for excluding 90 per cent of the excise duty refund from the profits of the business of assessee as per the Explanation (baa) to section 80HHC. The findings recorded by the CIT(A) to the effect that payment of excise duty has not reduced the business profit of the assessee, therefore, refund of excise duty paid should not be excluded from the business profit, had not been controverted by the department.
We are, therefore, inclined to agree with the learned Authorised Representative, that there is no infirmity in the order of the CIT(A) in directing the assessing officer not to exclude 90 per cent of such excise duty refund in terms of Explanation (baa), from the profit of business for computing deduction under section 80HHC.In the revenue's appeal for the assessment year 1993-94, first ground relates to exclusion of sale of scrap, sundry balance written back and octroi refund, while computing deduction under section 80-I of the Income Tax Act, 1961.
We have heard the rival contentions and found from the record that while computing deduction under section 80-I, the assessing officer excluded the sale of scrap, sundry debtors written back and octroi refund and rent from the business income of the assessee on the ground that these incomes are not derived from the industrial undertaking, and, therefore, no claim of deduction under section 80-I can be given to the incomes which are not derived from the assessee's industrial undertaking.
By the impugned order, the CIT(A) observed that these incomes except rent are ultimately connected either with the manufacturing activity of the assessee or with the sale of items manufactured by it, and, therefore, the same are to be treated as income derived from industrial undertaking eligible for deduction under section 80-1 of Income Tax Act.
Learned departmental Representative relied on the judgment of Tribunal, Ahmedabad, in case of Dy. CIT v. Meera Industries & Ors. (2004) 87 ITD 475 (Ahd) and submitted that assessing officer was perfectly justified in excluding the income which was not derived from industrial undertaking and further submitted that statute had used the words "derived from" in a Very narrow sense.
On the other hand, learned Authorised Representative submitted that profit on sale of scrap is eligible for deduction under section 80-1 in view of judgment of Gujarat High Court in Dy. CIT v. Harjivandas Juthabhai Zaveri & Anr. (2002) 258 ITR 785 (Guj).
We have considered the rival contentions and gone through the orders of the lower authorities as well as order of the Tribunal in assessee s own case in assessment year 1992-93, dated 22-9-2003, and found that the issue has been elaborately dealt with in para 6, page Nos. 4, 5 and 6 of the order and after discussing the judgment of the various High Courts, the Tribunal reached to the conclusion that the incomes on account of balance written off, rent received and discount are not to be included while computing the profit from business for the purpose of deduction under section 80HHC as such income cannot be said to have been derived from industrial undertaking. However, in respect of sale of scrap, we find that the issue is squarely covered by the decision of the jurisdictional High Court in the case of Harjivandas Juthabhai, (supra) in favour of the assessee, wherein it was held that the scrap generated during the course of manufacturing was eligible for deduction under section 80-I as reported in (2002) 258 ITR 785 (Guj) (supra). It was categorically observed by the High Court that it requires to be noted that if the assessee was not engaged in the industrial activity there was no question of generating any scrap and if the assessee was doing trading activity, obviously this section will not apply. In view of the above, we uphold the action of the CIT(A) regarding the inclusion of income of sale of scrap amounting to Rs. 3,02,336, eligible for deduction under section 80-I, whereas we reverse the action of the CIT(A) with regard to other income of sundry debtors written back and octroi refund, included for computation of deduction under section 80-I We direct accordingly.
Next grievance of the revenue relates to computation of deduction under sections 80HH and 80-I of the Income Tax Act on Sarigam unit. However, it is not clear either from the ground of appeal raised by the revenue nor by the submissions of learned departmental Representative as to what is the real grievance of the revenue. From the chart of grounds of appeal furnished by learned Authorised Representative during the course of hearing, this grievance of revenue has been dealt by the assessing officer at p. 15, para 4.4 and CIT(A) has dealt with the issue at p.
11, para 13, and relate to allowing deduction under section 80HH/80-I on the profit without deducting the allowable deduction under section 80HH/80-I of the Income Tax Act. We, therefore, confine our decision to this limited extent.
We have heard the rival contentions and perused the record. The issue is well-settled by the judgment of various High Courts including the MP High Court reported at 220 ITR 123 (sic), wherein it was held that separate deduction was to be allowed to the assessee independently under sections 80HH and. 80-I. We also find that the same issue is also covered by the order of the Tribunal in the assessee's own case for the assessment year 1992-93 and the issue was decided in favour of the assessee vide paras 19 and 20 of the order dated 22-9-2003. We, therefore, do not find any reason to interfere in the order of CIT(A) on this issue.
The next grievance of the revenue relates to deletion of disallowance of public issue expenditures of Rs. 24,05,135 on the ground that they were capitalised in the books of account.
The rival contentions have been heard and record perused. During the year the assessee incurred total expenditure of Rs. 24,05,135 on public issue. In the books of account, the entire expenditure was capitalised and the cost of fixed assets was increased accordingly. The assessee has also claimed depreciation on the enhanced cost of fixed assets.
During the course of assessment proceedings, by filing a letter dated 22-2-1996, the assessee claimed deduction of Rs. 1,51,688 under section 35D. By the impugned assessment order the assessing officer allowed the assessee's claim under section 35D of Rs. 1,51.688 by making an addition of Rs. 22,53,467 in the computation of income at para 12 of the assessment order. The assessing officer was of the view that assessee had claimed deduction of Rs. 24,05,135 whereas amount eligible for deduction is Rs. 1,51,688; he, therefore added Rs. 22,53,467 (Rs. 24,05,135 - Rs. 1,51,638) in the income of the assessee.
By the impugned order, the CIT(A) directed the assessing officer to reduce the income of Rs. 24,05,135, by recording a finding that nothing had been charged to P&L a/c and, therefore, no profit as per the P&L a/c has been arrived at without reducing any part of these expenditure.
The finding recorded by the CIT(A) has not been controverted by the learned departmental Representative. We, therefore, do not find any reason to interfere in the findings recorded by the CIT(A) for excluding a sum of Rs. 24,05,135 from the assessed income, in respect of the public issue expenditure which was neither debited to P&L a/c nor claimed in the return of income. The assessee had only claimed a sum of Rs. 1,51,688 under section 35D and not Rs. 24,05,135.
Next grievance of the revenue relates to advertising expenses and press announcement expenditure for public issue claimed as deduction under section 37(3) of the Income Tax Act.
We have heard the rival contentions and found from the record that expenditure incurred on advertisement and press announcement was treated by the assessing officer as falling within the provisions of section 35D. He, therefore, declined the assessee's claim for deduction of this expenditure under section 37(3) of the Act.
By the impugned order, the CIT(A) observed that provisions of section 35D(2)(c)(iv) pertain to only certain specified expenses in relation to issue for public subscription of the shares or debentures of a company.
The other expenses not enumerated would, therefore, not be affected either way by these provisions. He, therefore, allowed the assessee's claim for deduction of this expenditure under section 37(3).
The learned D6partmental Representative relied on the order of the assessing officer and submitted that such expenditure can be allowed only as per the provisions of section 35D and submitted that matter may be restored back to the assessing officer for verification.
On the other hand, learned Authorised Representative relied on the judgments, in Mohan Meakins Breweries Ltd. v. CIT (1979) 118 ITR 101 (HP) and CIT v. Raj Brothers (1986) 171 ITR 249 (AP).
We have considered the rival contentions and gone through the orders of the lower authorities and deliberated on the case law relied on by the lower authorities in their respective orders and cited at Bar by the learned Authorised Representative. The provisions of section 37(3) start with non obstante clause in relation to provisions of section 37(1). Thus, so far as the expenditure of advertisement is concerned, the same is required to be given separate treatment and, therefore, following the orders of the Himachal Pradesh High Court and AP High Court, as stated above, we are of the view that this expenditure cannot be designated to be expenditure in connection with the printing and advertisement of the prospectus as mentioned in section 35D(2)(c)(iv); of the Income Tax Act, but is required to be allowed as per the provisions of section 37(3) of the Income Tax Act. We, therefore, direct the assessing officer to consider the allowability of these expenses under section 37(3) of the Act, rather than treating these expenses under section 35D.Next grievance of the revenue relates to the CIT(A)'s action for directing the assessing officer to allow deduction under section 80HHC by disregarding the fact that along with the original return of income-tax auditors' report was not furnished.
We have heard the rival contentions and found from the record that along with return of income the assessee did not file tax auditors' report prescribed under Form 10-CCAC. The assessing officer processed the return under section 143(1)(a) and the assessee's claim for deduction under section 80HHC was declined. After receiving the intimation under section 143(1)(a), the assessee-company filed a letter dt. 15-12-1994, enclosing the Form 1O-CCAC and requested for rectification of intimation under section 143(1)(a). The assessing officer declined the assessee's rectification petition. However, the CIT(A) vide its order dated 23-3-1995, in respect of order passed under section 143(1)(a), allowed the assessee's claim. However, while completing the assessment under section 143(3), the assessing officer again declined the assessee's claim of deduction under section 80HHC on account that the department is in appeal against the order of the CIT(A) before the Tribunal.
By the impugned order, the CIT(A) observed that while passing order under section 143(3), the assessing officer was having the appellate order of the assessee in his favour and merely the department opting to file an appeal against the order of the CIT(A) to the Tribunal will not entitle the assessing officer for not giving effect to the order of the CIT(A).
The issue regarding declining the deduction merely on the basis of not filing of auditors' report in the prescribed format along with return of income has already been decided by the jurisdictional High Court in favour of the assessee as reported in CIT v. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Guj), wherein it was observed that filing of audit report along with the return is merely procedural in nature and requires only substantial compliance. The Tribunal, Delhi Bench, also in its order reported in Minda Huf Ltd. v. Addl. CIT (2004) 82 TTJ (Del) 305 on the very same point, held that non-furnishing of auditors' report will not disentitle the assessee's claim for deduction, if the same has been filed in the course of assessment proceedings. In the instant case, we find that the auditors' report in the prescribed format was already in the record of the assessing officer, when he was in sesin of the matter under section 143(3).
Respectfully following the ratio laid down in the judgment of the jurisdictional High Court reported in (1993) 201 ITR 325 (Guj) (supra), we are inclined to agree with the learned Authorised Representative that there is no merit in the action of the assessing officer for declining the assessee's claim of deduction under section 80HHC in the scrutiny assessment, when undisputedly, the audit report in the prescribed format was already in his record when he was in sesin of the matter.
Next grievance of the revenue relates to exclusion of excise duty from the turnover of the assessee- company and allowing deduction under section 80HHC.The rival contentions have been heard and record perused. While computing the deduction under section 80HHC, the assessing officer excluded the excise duty from the turnover of the assessee and further held that 90 per cent of this is liable to be excluded from the profits of the business as per the Expln. (baa) for computing deduction under section 80HHC.The learned Authorised Representative had drawn our attention towards the order of the Tribunal in assessee's own case for the assessment year 1992-93 at para 15, wherein the issue has been dealt with in details and action of the CIT(A) was upheld to the effect that the refund of excise duty of earlier year cannot be included in the total turnover for the year under consideration for the purpose of computing deduction under section 80HHC.We have gone through the impugned order of the Tribunal in assessee's own case. Same issue has been dealt with by us while disposing of the revenue's appeal for assessment year 1992-93 and discussed in detail at para 6, hereinabove, wherein we held that excise duty refund was neither includible in the turnover nor 90 per cent of it is required to be reduced from the business profits in terms of Expln. (baa) below section 80HHC(4B). As the facts and circumstances of the case under consideration for the assessment year 1993-94 are the same, we do not find any reason to deviate from the conclusions already drawn by us in assessee's own case for the assessment year 1992-93.
Next grievance of the revenue relates to exclusion of 90 per cent processing charges from the profit of the business while computing deduction under section 80HHC.In the course of assessment, the assessing officer found that during the year, the assessee has received processing charges of Rs. 1,02,70,561. As per the assessing officer, the said processing charges fall within the ambit of Expln. (baa) of section 80HHC(4B) and, therefore, 90 per cent of such processing charges is required to be excluded from the 'profits of the business' for computing deduction under section 80HHC.By the impugned order, the CIT(A) observed that the expression "charges or another receipts of a similar nature" as given in Explanation (baa) has to be interpreted by applying the rule of 'ejusdem generis'. As per the CIT(A) only such charges or other receipts which are of the species, such as brokerage, commission, interest, rent are excludible to the extent of 90 per cent. The CIT(A) also recorded a finding that processing charges earned by the assessee-company are in the nature of trading receipt and merely because words used are "processing charges", the same cannot be excluded from the profits of the business. He, therefore, held that the assessing officer was not justified to treat the sum of Rs. 1,02,70,561 to be in the nature of items prescribed for exclusion to the extent of 90 per cent in terms of Explanation (baa).
It was argued by the learned departmental Representative that processing charges received by the assessee were in the nature of receipts which have been described under Explanation (baa) and, therefore, while computing eligible business income, 90 per cent of such receipts are required to be excluded from the profit of the business for computing deductions under section 80HHC.On the other hand, learned Authorised Representative submitted that processing charges received by the assessee- company was linked to the manufacturing activity of the assessee and, therefore, there was no reason for treating such income as dormant income liable to be excluded as per the Explanation (baa). He also relied on the judgment of the Bombay High Court in the case of CIT v. Bangalore Clothing Co. (2003) 260 ITR 371 (Bom) in which it was held that job processing activity is linked with the manufacturing activity of the assessee and, therefore, 90 per cent of such receipts are not to be excluded from such business profit while computing deduction under section 80HHC.We have considered the rival contentions and deliberated on the case law cited at Bar by the learned Authorised Representative. We found from the record that income from processing charges was related to main manufacturing activity undertaken by the assessee-company. As per the Expln. (baa) profit of the business means profit of the business as computed under the head "Profits and gains or profession" as reduced by 90 per cent of any receipts by way of brokerage, commission, rent, interest, charges or any other receipt of a similar nature included in such profits. The doctrine of ejusdem generis lays down well accepted principle of interpretation of statutes that the meaning of general words following the specific words in succession would derive colour from the specific words preceding them. Per contra, the meaning of general words would have to be seen in the light of the words in whose company such -general words fall, the reasons being that such general words are used to provide completeness to the specific words in the statutes and to avoid the possibility of anything of that nature being excluded. In such circumstances, these general words should not be independent of the words accompanying them. The object of such general words is only to supplement the scope of independent words used in the language of the section. It implies that such words occurring in the provisions of the Act be read as accompanying them. Under Expln. (baa), the profits of the business for the purpose of 80HHC do not include receipts which do not have the element of turnover like rent, commission, interest, charges, etc. As some expenditure is incurred for earning such dormant income an ad hoc 10 per cent deduction from such income is provided for to account for those expenses. On the basis of facts and circumstances of each case, the assessing officer has to ascertain whether receipt of brokerage, interest, commission, rent or charges of similar nature, were part of operational income. No standard tests for deciding what constitutes operational income can be laid down. The assessing officer has to consider the nature of business; the nature of activity and such other factors to find out whether receipts are operational income or the dormant income of the assessee. The department has to ascertain as to what is the dominant business of the company and whether receipts like rent, brokerage, interest, commission, etc., accrued as part of the main business activity or whether they accrued out of incidental business activity. In the instant case, the assessing officer was required to find out if the processing charges earned by the assessee relate to the main manufacturing activity in which the assessee was involved and which is either subject to export or local sales. On the basis of material on record, we find that the assessee- company is engaged in manufacturing of various chemicals, viz., ortho nitro chloro benzene, para nitro chloro benzene and its derivatives. The assessee is exporting these items and also undertaking job work 1n relation to these products. The income earned by the assessee on account of processing charges by utilising plant and machinery, and other manufacturing facilities installed in its industrial undertaking and, therefore, such receipts do not have element of dormant receipts like rent, commission, interest, etc. The finding recorded by the CIT(A) to the effect that the processing charges earned by the assessee are in the nature of manufacturing receipts and merely because words used ar 6 1.
"processing charges", the same cannot be excluded from the profits of business, have not been controverted by the department by bring any positive material on record. Keeping in view the judgment of Bombay High Court, as discussed hereinabove, we do not find any infirmity in the order of CIT(A) for not treating such processing charges in the nature of income falling within the purview of Explanation (baa) of section 80HHC(4B), 90 per cent of which is required to be excluded from "profits of the business", while computing the deduction under section 80HHC. No contrary judgment of any High Court or Tribunal order was brought to our notice by the learned departmental Representative during the course of hearing. We are, therefore, inclined to agree with the learned Authorised Representative that in view of judgment of Bombay High Court such processing charges are not in the character of the receipt falling within the purview of Explanation (baa), 90 per cent of which is required to be excluded from business profit while computing deduction under section 80HHC.The last grievance of the revenue in the assessment year 1993-94 relates to the CIT(A) direction to allow depreciation at 100 per cent in respect of energy saving devices as mentioned in para 3(iii) of machinery and plant in Appen. I of IT Rules, 1962.
Rival contentions have been heard and record perused. The case of the assessing officer is that the assessee is eligible for depreciation on the machinery "energy saving devices" at 100 per cent rate and not on the building meant for putting the energy saving devices. The assessing officer held that such building can be very well treated as plant so as to eligible for normal rate of depreciation allowable to the plant and machinery and not at 100 per cent. The assessing officer further stated that even though no addition to this category of block of building, which such energy saving equipment was placed, was made during the year under consideration, but the assessee has made an addition to the building in the assessment year 1992-93 and considering the same as plant and machinery, the assessee claimed 100 per cent depreciation. As per the assessing officer, the issue of claim on depreciation on the block of building was examined last year in details and it was held that since equipment in respect of which specialised structure of building was not energy efficient, the assessee is not entitled to get 100 per cent depreciation. The assessing officer, however, allowed 25 per cent depreciation on such structure by observing that as per the photographs of the building, it appears that specialised for the energy saving equipment and hence it can be treated as plant and machinery.
By the impugned order, the CIT(A) directed to allow the claim of depreciation, as per the order of his predecessor dated 2-1-1996, for the assessment year 1992-93.
It was argued by the learned departmental Representative that the CIT(A) was not justified in directing the assessing officer to allow 100 per cent depreciation on the building/structure in which the energy saving device was kept. As per the learned departmental Representative, the department has no grievance for allowing 100 per cent depreciation on the energy saving device itself, but the premises in which such equipments are being put cannot be allowed 100 per cent depreciation and the assessing officer has already allowed depreciation at 25 per cent on such structure by treating it as a plant. On the other hand, the learned Authorised Representative also submitted that 100 per cent depreciation has been claimed by the assessee and allowed by the order of the Tribunal in the case of energy saving devices only, and that no claim for 100 per cent depreciation in respect of structure/building in which such machinery was put was made by the assessee, as alleged by the assessing officer.
We have considered the rival contentions and find from the record that there is no dispute of revenue and assessee both with regard to allowing of the assessee's claim of 100 per cent depreciation on the energy saving devices as per the order of the Tribunal in assessee's own case of the assessment year 1992-93. However, in respect of building/structure in which such machinery is required to be put have already been treated by the assessing officer as plant, We are, therefore, inclined to agree with the learned Departmental Representative that such building/structure is not eligible for 100 per cent depreciation like energy saving device. However, it is not clear from the record whether the value of such building/structure was also included in the value of energy saving device on which 100 per cent depreciation has been claimed. In the interest of justice, we restore this ground to the file of assessing officer with a direction to verify the record and allow 100 per cent depreciation on the energy saving devices and restrict the claim of depreciation at 25 per cent in respect of building/structure meant for putting such plant. We direct accordingly.
The first ground in the assessee's appeal is of general nature, which was not pressed by the learned Authorised Representative, hence, the same is dismissed in limine, as having not been pressed.
Next grievance of the assessee relates to treatment of interest income of Rs. 72,01,854, earned on temporary investment of share application money. The brief facts are that during the year under consideration, the assessee made a public issue of equity shares on 17-2-1992, for its expansion project. The amount received on application money was put in the bank as deposits and an interest income of Rs. 72,01,854 was earned on such bank deposits. The assessing officer observed that as per the computation of total income filed along with return of income, the assessee has claimed a deduction of interest on public issue deposit.
The assessing officer held that interest on deposit of share application money is income from other sources. The same is liable to be taxed separately and not deductible either in public issue expenses account nor to be capitalised towards the cost of assets. It was submitted before the assessing officer that in terms of prospectus for public issue and in accordance with the section 73(3) of the Companies Act, 1956, the assessee was required to keep the share application money in separate bank account in schedule bank until permission for listing of shares on the stock exchange was granted. As per the assessee, the violation of such provisions of Companies Act is severely punishable. It was also submitted by the assessee that the company does not voluntarily deposit the s are application money with the bank, but was statutorily required to do so. After considering various judgments of the High Courts and the Supreme Court including the case of Challapalli Sugar Ltd. v. CIT (1975) 98 ITR 167 (SC), the assessing officer reached to the conclusion that interest income on such deposits was liable to be taxed as income from other sources and the assessee is not eligible to get such income set off against such public issue expenses nor entitled to capitalise such income. By the impugned order, the CIT(A) confirmed the action of the assessing officer.
It was submitted by the learned Authorised Representative that the issue is squarely covered by the order of the Tribunal, Jodhpur Bench, in the case of Neha Proteins Ltd. v. Asst. CIT (2004) 83 TTJ (Jd) 236, wherein it was held that interest earned on deposit of share application money received on public issue for expansion of existing business was entitled to set off out of public issue expenses incurred for public issue and such interest income is not chargeable as income from other sources. The learned Authorised Representative also relied on the order of the Tribunal, Mumbai Bench, in the case of J.M. Shares & Stock Brokers Ltd. v. Dy. CIT (2004) 83 TTJ (Mumbai) 1052, in which it was held that where the deposit in the bank was made under mandatory situation, the interest is allowed to be set off against the share issue expenses. While deciding the issue the Mumbai Bench followed the order of coordinate Bench in the case of Dy. CIT v. Exlo GWB Garden Saft Ltd., ITA No. 6113/Mum/1995 and 1931/Mum/1998. Learned Authorised Representative, therefore, submitted that issue is squarely covered by the orders of Tribunal referred hereinabove and submitted for upholding the assessee's claim. He further submitted that it was not a surplus money parked with the bank with an intention to earn interest thereon, but the assessee was under an statutory compulsion to keep the money in the bank account till listing of shares at stock exchange.
On the other hand, learned departmental Representative submitted that the issue is squarely covered in favour of the revenue by the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkalies & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC) in which it was held that the interest earned by the assessee before the commencement of the business on the sh6rt-term deposits with the banks out of term loans secured from the financial institutions, is income chargeable under the head income from other sources. He, therefore, justified the orders of lower authorities.
We have considered the rival contentions and gone through the orders cited by the learned Authorised Representative in the case of Neha Proteins (supra) wherein after considering the judgment of Hon'ble Supreme Court in the case of Tuticorin Alkalies (supra) and subsequent decision of the Supreme Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC), the Tribunal held that where the assessee had gone for public issue of equity shares, so as to finance the expansion of its existing business and assessee has incurred certain expense on public issue, the amount received on share application money, which was kept in banks and on which interest was earned, the assessee is eligible to set off of that interest income against the public issue expenses incurred. It was further observed by the Tribunal that the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra), while allowing the set off of such income against the project expenses in the case of Bokaro Steel Ltd. (supra) has already considered its earlier judgment in the case of Tuticorin Alkalies (supra). The Tribunal has also reproduced the relevant portion of the judgment of Bokaro Steel Ltd. (supra) where it was observed by the Hon'ble Supreme Court that the arrangement which was made between the assessee-company and the contractors, pertaining to the receipts on account of certain amenities granted to the contractor's staff including hire charges for plant and machinery which was given to the contractor by the assessee for use in the construction of the assessee and the interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction, the activities of the assessee in connection with all these receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advance which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. After concluding the above observations of the Hon'ble Supreme Court in the case of Bokaro, Steel Ltd. (supra), the Tribunal held that "the assessee is entitled to set off interest earned on deposits out of public issue money against the expenses incurred for public issue." In that view of the matter, the Tribunal reversed the findings of the CIT(A) and directed the assessing officer to set off the interest earned by the assessee against the public issue expenses.
The Bombay High Court in the case of J.M. Shares and Stock Brokers Ltd. (supra) observed that where deposits with bank are kept under mandatory situation, the assessee is entitled to set off of interest income against the share issue expenses.
The crux of the issue revolves around treatment of interest income on the deposits given to the bank, as to whether the interest income was capital receipt or. Revenue receipt. There is no dispute to the general principle that interest income bears the character of revenue receipt.
But, this general principle is subject to the exception that when such interest income is received prior to the commencement of business or for expansion of business of industrial undertaking and is having direct and proximate connection with the acquisition of fixed/capital asset during the course of implementation of the project, such interest income will take the character of capital receipt. This exception is also subject to further restriction that deposit on which interest income was earned was given out of business compulsion/statutory requirement, in order to enable the assessee to facilitate acquisition of fixed assets and not as a sweet will with an intention to earn interest income thereon. If the facts and circumstances of the case warrant that deposit was given as a business compulsion/statutory requirement and is having direct and proximate connection with the acquisition of fixed/capital assets, the interest income earned on such deposit will be in the nature of capital receipt not liable to taxed.
Such capital receipt is eligible to be set off against the capital cost of such assets. However, if giving of such dep6sit is not related to or not compulsory in the process of acquisition of fixed assets, interest income earned thereon will not qualify for reduction out of capital cost but will be liable to be taxed as revenue receipt under the head "Income from other sources". It will not make any difference even if earning of interest on such deposit is going to contribute towards reduction of the project cost.
Similarly, any other income, other than interest income, earned during the implementation of the project which is intrinsically and inextricably connected with the construction activity or acquisition of fixed assets, will be in the nature of capital receipt not liable to tax. Such income can be adjusted against the capital cost of the project.
In the instant case, there is no dispute to the fact that such deposit was made in a bank as a statutory requirement for keeping such share application money in separate bank account in a scheduled bank until permission for listing of share on stock exchange is granted. Decision for putting the deposit in bank was not taken as a prudent business decision to earn interest income thereon. Let us now examine the ratio laid down in the various case law as discussed by the lower authorities and cited at Bar. In the case of Tuticorin Alkalies Chemicals & Fertilisers Ltd. (supra), the Hon'ble Supreme Court vide its order dated 8-7-1997 held : "That when a company has surplus funds in its hands and in order to earn income out of the surplus funds, it had invested for the purpose of earning interest, the interest thus earned is clearly of revenue in nature and would have to be taxed accordingly. The application of income for payment of interest on the borrowed funds would not affect its taxability in any way. It was also observed that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. He may, or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not seize to be his income." The Hon'ble Supreme Court further observed that the company had taken term, loan from various banks and financial institutions for the purpose of setting up of the factories. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with the banks. The company also gave interest bearing loans to the employees to purchase vehicles. The interest earned by the company from the above deposits and loans was sought to be capitalised reducing the preoperative expense. On the facts and circumstances, the Supreme Court held that interest flowing from such investments is taxable income and is to be taxed under the head "Income from other sources". The interest paid by the company on such borrowed funds cannot be allowed as deduction under section 57 of the Income Tax Act. Since the business has not commenced, the expenditure in the form of interest paid cannot be allowed as deduction under the head "Business" and thereby get adjusted against the income from other sources. In view of the above decision of the Hon'ble Supreme Court, the interest earned by a company during the preoperative period from surplus deposits parked in banks and financial institutions is taxable as income from other sources. It does not make any difference if the deposits are borrowed on which the company has to pay interest. Such interest paid cannot be adjusted against interest assessable as income from other sources.
In the case of Bokaro Steels Ltd. (supra), the Hon'ble Supreme Court vide its order dated 18-12-1998, observed that: "When the assessee at the time of implementation of its project, let out its quarters to the employees of the contractors who were engaged in the construction of the assessee's plant, hire charges for letting out plant and machinery to contractors, receipts from letting out of quarters to the employees of the contractors, interest on amount advanced to the contractors and royalty received from them for allowing excavation of stones, etc., are all intrinsically connected with the construction activities and are capital receipts. Such capital receipts can be set off against capital cost and is, therefore, not liable to tax." In the case of Karnal Co-operative Sugar Mills Ltd. (supra), the Hon'ble Supreme Court vide its order dt, 23-4-1999, observed that : "When the assessee has deposited money to open letter of credit for purchase of machinery required for setting up of its plant in terms of assessee's agreement with the supplier, any income earned on such deposit is incidental to the acquisition of assets for setting up of the plant and machinery. The interest was a capital receipt which would go to reduce the cost of assets." Keeping in view the ratio laid down in various Supreme Court decisions, viz., in the cases of Bokaro Steels Ltd. (supra) and Karnal Co-operative Sugar Mills Ltd. (supra), after considering its earlier judgment in case of Tuticorin Alkalies (supra), we find that in the instant case, deposit with the bank was under statutory compulsion; this is not the case where any surplus money which was left idle had been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly and intrinsically linked with the public issue and, therefore, the expenditure incurred on public issue can very well be set off against the income arising from deposit of money received on public issue. Thus, income earned on such deposits was incidental to the public issue which in turn was for expansion of the assessee's project. In view of the peculiar facts and circumstances of the case, the ratio laid down by the Supreme Court in the case of Tuticorin Alkalies & Fertilisers Ltd. (supra) will not be attracted, wherein surplus money available with the assessee was parked in the bank for earning interest income thereon. More appropriate decision for application in the factual situation of the present case are Bokaro Steels Ltd. (supra) and Karnal Co-operative Sugar Mills Ltd. (supra). The decision of Tribunal, Jodhpur and Mumbai Benches, cited by the learned Authorised Representative and discussed hereinabove are directly in favour of the assessee on the very same issue in which interest received on deposit of share application money, which was statutorily required to be deposited in the bank and the interest income earned thereon, was held to be liable to be set off against the expenses on public issue/expansion project. No contrary decision to this effect was brought to our notice by the learned departmental Representative. Respectfully following these decisions of co-ordinate Bench, we are persuaded to agree with the contention of the learned Authorised Representative that the interest income of Rs. 72,01,854 is to be set off against the cost of public issue and cost of capital assets, and not to be treated as income from other sources.
In view of the above, respectfully following the decisions of the Tribunal, Jodhpur and Mumbai Benches, we are inclined to reverse the findings of the lower authorities and allow this ground in favour of the assessee.
Ground No. 5 in respect of rent received for which deduction under section 80I/IA is to be allowed, the assessing officer disallowed assessee's claim of deduction in respect of rental income under section 80-IA, which was confirmed by the CIT(A) by observing that such income cannot be said to 'be' derived from industrial undertaking.
It was submitted by learned departmental Representative that such rental income cannot be said to have arisen out of manufacturing activity of the assessee, therefore, no deduction is allowable on such income under section 80-I/IA. Keeping in view the judgment of Hon'ble Supreme Court in, the case of Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC), we are inclined to agree with the learned departmental Representative that rental income does not qualify for deduction under section 80-I/IA, on the ground that such income is not derived from assessee's industrial undertaking.
Ground No. 6 is regarding not granting of deduction under sections 80HHA and 80-I in respect of manufacturing activity carried out at third party premises on job work. This ground has already been restored to the assessing officer by the Tribunal in assessee's own case in the assessment year 1992-93 vide order dt, 22-9-2001 As the facts and circumstances of the case during the relevant' assessment year 1993-94 under consideration are the same, we restore the ground No. 6 to the file of assessing officer by respectfully following the order of the Tribunal. The finding of the Tribunal has been given at page Nos. 7 to 10, para 9.
Ground No. 7 relates to- allowing public issue expenses. From the order of the assessing officer we find that assessee had withdrawn its claim for capitalisation of such expenses and stated that such expenses are to be allowed' as per section 35D.In view of above, we dismiss this ground of assessee's appeal in limine.
Next grievance of the assessee in ground No. 8(a) regarding exclusion of excise duty and sales-tax from the total turnover while computing deduction under section 80HHC, has already been decided in favour of the assessee in view of the Special Bench decision in the case of IFB Agro Industries, v. Dy. CIT (2002) 83 ITD 96 (Cal)(SB), wherein it was held that receipts of excise duty and sales-tax do not include an element of profit, therefore, not to be included in total turnover while computing deduction under section 80HHC. Same view had been taken in the case of CIT v. Chloride India Ltd. (2002) 256 ITR 625 (Cal).
In view of above, we are inclined to allow this ground of assessee's appeal.
In ground No. 8(b), the assessee has grievance that the assessing officer has taken the export sales as booked in the accounts, where the same should have been considered on the basis of export turnover determined under section 80HHC of the Income Tax Act. From the order of the CIT(A), we find that he has not fully dealt with the issue. We, therefore, restore: this issue to the file of CIT(A) for deciding afresh as per the law, after giving reasonable opportunity to the assessee.
Ground No. 9 regarding the computation of deduction under section 80HHC, after excluding 100 per cent of amount recovered from the employees and 90 per cent interest from bank deposits, has already been decide by the Tribunal against the assessee vide its order dated 22-9-2003, for the assessment year 1992-93. We, therefore, dismiss this ground of appeal of the assessee. The issue has been dealt with by the Tribunal at page Nos. 4 to 6, para 6 of its order. Learned Authorised Representative fairly conceded for dismissal of this ground in view of Tribunal order in assessee's own case in earlier assessment year 1992-93.
Ground No. 10 regarding the CIT(A)'s action in not directing the assessing officer to deduct the value of cash compensatory support and other export incentives from the value of goods purchased for trading in exports, has already been decided against the assessee in Tribunal order for assessment year 1992-93 vide order dated 22-9-2003. The issue has been dealt with at page Nos. 6 to 7, para 7 of the Tribunal order.
As the facts and circumstances of the case during the year under consideration are the same, respectfully following the order of the Tribunal in assesses own case for assessment year 1992-93 vide order dated 22-9-2003, we dismiss this ground of assessee's appeal.
Ground No. 12 is regarding deduction of interest under section 36(1)(iii) amounting Rs. 4,73,007 paid to the Gujarat Industrial Development Corpn.
Rival contentions have been heard and record perused. The facts of the case are that the assessee obtained loan from GIDC which was utilised for purchase of land. In the books of account the interest paid had been capitalised and included in the cost of the land. Since, no depreciation was admissible on land, during the course of assessment proceedings, the assessee-furnished an alternative contention relating to deduction of interest under section 36(1)(iii), The lower authorities held that after capitalisation of the amount of interest, the so-called interest no longer retained its separate identity but was merged with the cost of acquisition of land. In these circumstances, as lower Authorities Applied, the provisions of section 43(1) read with section 32, there did not arise Any question of application of section 36(1)(iii) of Income Tax Act. It Was further observed that in view of treatment given by the assessee itself in its books of account, the assessee is no more entitled to claim deduction under section 36(1)(iii) solely for the purpose of computation of tax liability, The learned Authorised Representative contended that, issue, is already decided by the jurisdictional High Court in favour of the assessee in Dy. CIT v. Core Healthcare Ltd.(2001) 251 ITR 61 (Guj).
On the' other hand, learned departmental Representative relied on the orders of lower authorities.
We have considered the rival contentions and are in agreement with the learned Authorised Representative that entire controversy has been resolved in case of Core Healthcare (supra), wherein it was observed that notwithstanding capitalisation of interest in the books of account the assessee is eligible to claim such interest under section 36(1)(iii). While so holding reliance was placed on the ratio of the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC).
In view of the above; we find that the issue has already been decided in favour of the assessee by judgment of jurisdictional High Court reported at (2001) 251 ITR 61 (Guj) (supra) in case of Core Healthcare.
As the facts and circumstances of the case are the same, we direct the assessing officer to allow the assessee's claim for deduction of interest paid to GIDC amounting to Rs. 4,73,007 under section 36(1)(iii).
Ground No. 13 regarding disallowance of entertainment expenditure of Rs. 7,911 has not been pressed by the learn ed Authorised Representative, therefore, the same is dismissed in, limine.
In the result, revenue's, appeal for the assessment year 1992-93 is dismissed, whereas the cross-appeals of the assessee and the revenue for the assessment year 1993-94 are allowed in part, as indicated above.