1. The departmental appeal and the assessee's Cross Objection arise from the order dated 28.3.2001 of CIT(A)-XLIV, Mumbai and are disposed of by this common order as under: On the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to include interest receipt while calculating the deduction Under Section 80HHD The relevant facts, briefly stated, are that the assessee is entitled to deduction Under Section 80HHD of the IT Act. The AO computed allowable deduction in the following manner: Particulars Amount (Rs.) Amount(Rs.)Total Turnover 64,34,23,313/-Foreign Exchange earinings 28,53,58,302/-Total assessed business income 8,81,96,788/-(Less) Interest income 19,92,561/-Assessed business income for the purposes ofdeduction Under Section 8HHD 8,62,04,227/-Deduction Under Section 80HHD = ---------------------------------------------------- Deduction % 50% of the above 1,91,15,791/- Balance 50% to the extent of reserve created of Rs. 1,96,00,000/- 1,91,15,792/- Deduction Under Section 80HHD 3,82,31,583/- The subject matter of the present dispute is the reduction of the total assessed business income by interest income of Rs. 19,92,561/- for the purposes of computing deduction. When the matter came up before the ld.CIT(A), he held that the interest income earned by the assessee was in the nature of business income and the profits derived from services rendered to foreign tourists would be a proportion of the receipts in foreign exchange and the total receipts of the business. The ld. CIT(A) further observed that it is nowhere mentioned Under Section 80HHD that the interest income assessed as business income must be disregarded for the purposes of computation of deduction. He, therefore, directed the AO to recalculate the deduction allowable to the assessee Under Section 80HHD.3.The ld. DR contended before us that Section 80HHD allows deduction in respect of earnings in convertible foreign exchange. As per this section, deduction is allowable with regard to profit derived by the assessee from services provided to foreign tourists. It is argued that interest income is neither received in convertible foreign exchange nor it is for the services provided to foreign tourists. It is, therefore, contended that interest income has to be ignored while computing deduction Under Section 80HHD. He relied on the following cases: v. ACIT v. Nirma Industries Ltd. 95 ITD 199 (Ahmedabad Special Bench) The ld. counsel appearing on behalf of the assessee strongly supported the order of the ld. CIT(A) and contended that for the purposes of determining the income which is allowable for deduction Under Section 80HHD, the entire business income of the assessee has to be taken into account in terms of the provisions of Sub-section (3) of Section 80HHD.The Id. counsel pointed out that the interest income has already been brought to the charge of tax by the AO as income from business and profession and therefore there is no justification, whatsoever, in treating such interest income as business income while computing deduction Under Section 80HHD. The Id. counsel relied on the following cases: iii. ITAT, Mumbai order dated 26.3.2004 in the case of Fountain Head Exports in IT A No. 5817/Mum/2000 4. We have given a careful consideration to the rival submissions vis-a-vis the relevant facts of the case and in the light of the provisions of law and the legal position as emerging from the precedents cited before us. The deduction Under Section 80HHD is available to assessee's who are engaged in the business of hotel or of tour operators approved by the prescribed authority or of travel agents. In respect of the AY under appeal, such deduction under Sub-section (1) is allowable at the rate of 50% of the profits derived by the assessee from services provided to foreign tourists. Sub-section (2) further stipulates that this section applies only to services provided to foreign tourists. The receipts in relation to which are received in or brought into India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf. The modality of determining of the relevant profit as prescribed under Sub-section (3) reads as under: (3) For the purposes of Sub-section (1), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business (as computed under the head 'profits and gains of business or profession') the same proportion as the receipts specified in Sub-section (2) as reduced by any payment, referred to in Sub-section (2A), made by the assessee bear to the total receipts of the business carried on by the assessee.
There is no dispute that the assessee fulfils the primary conditions stipulated under Sub-sections (1) and (2). The only dispute is as to whether while determining the quantum of profits allowable for deduction, as per the provisions of Sub-section (3), the interest income has to be considered as business income or not. The cases relied upon by the ld. DR are substantially on the issue as to whether any income can be said to be in the nature of income derived from industrial undertaking or derived from export of goods or merchandise.
Reference to a few cases shall suffice. In the case of Pandian Chemicals Ltd. (supra), the assessee company received income on deposits with Electricity Board for supply of electricity to the industrial undertaking. It was held by the Supreme Court that such interest income cannot be said to be 'derived' from the industrial undertaking. The Supreme Court was concerned about the interpretation of Section 80 HH of the IT Act, which allows deduction in respect of any profits and gains derived from an industrial undertaking. In the case of Gimpex Pvt. Ltd. (supra), it was held by the Madras High Court that interest earned from Fixed Deposit by investing surplus fund is income from other sources and not income from business. The question of deduction under Chapter VI-A was not involved in this case. In the case of Nirma Industries Ltd. (supra), the ITAT, Ahmedabad Special Bench held that interest from delayed payment on sale proceeds and interest on deposits with banks and other companies is not in the nature of income derived from the industrial undertaking for the purposes of allowing deduction Under Section 80-I of the Act. In our view, the cases relied upon by the Id. DR are not relevant for deciding the issue which is the subject matter of this appeal. As mentioned above, the interest income has already been brought to the charge of income tax by the AO as business income. There is no finding that such interest income is assessable as 'income from other sources' and not as 'business income' and therefore this is a settled issue, which is not further disputed in appeal by either of the parties. Therefore, the point for adjudication before us is as to whether an item of income which has been assessed as business income can be treated as income from other sources only for the purposes of computation of deduction Under Section 80HHD. Similar question arose before the Bombay High Court in the case of Alfa Laval (I) Ltd. (supra), in the context of interpretation of Section 80 HHC. It was held by the High Court that where the AO had assessed interest received by the assessee as part of business profits under the head 'profits & gains of business or profession' he cannot treat the said income as 'income from other sources' so as to exclude it from the business profits while calculating deduction Under Section 80 HHC. This view is further followed in other cases relied upon by the ld. counsel for the assessee and referred to above. The ld. DR has forcefully argued before us that the interest income has no connection whatsoever with the services rendered to foreign tourists or are received by the assessee in convertible foreign exchange. In our view, this argument is besides the point. The question is as to whether the income as derived by the assessee in convertible foreign exchange from services rendered to foreign tourists is relevant for the purpose of Sub-sections (1) and (2) of Section 80HHD. However, Sub-section (3) refers to profits of the business as computed under the head 'profits & gains of business or profession' for the purpose of determining proportion of the profits which is eligible for deduction under Sub-section (1). Admittedly, in the present case, interest income has been assessed under the head 'profit & gains of business or profession'. Having' done this, in our view, the AO is legally precluded from treating such interest income as non-business income for the purposes of Sub-section (3) of Section 80HHD. In our view, the ld. CIT(A) has rightly decided the issue and therefore his order on this issue is confirmed.
The ld. CIT(A) erred in confirming the disallowance of Rs. 13,741/- Under Section 43B in respect of ESIC paid by the respondent on 27.4.98.
6. We have heard both the sides and have gone through the facts. The disallowance has been made by the Revenue authorities in respect of a sum of Rs. 13,741/- Under Section 43B on the ground that employer's contribution was payable on 26.4.98 whereas the same was paid on 27.4.98. Thus, there is a delay of merely one day. We find that after amendment of first proviso to Section 43B and the deletion of the 2nd proviso by the Finance Act 2003 w.e.f. 1.4.2004, the ITAT. Mumbai Benches have consistently held that these amendments are retrospective in effect and after this amendment, if any payment is made before the due date for filing the return of income Under Section 139(1), no disallowance Under Section 43B can be made. Consistent with this issue, we reverse the order of the CIT(A) on this issue and direct the AO to allow deduction for the impugned sum of Rs. 13,741/-.
The ld. CIT(A) erred in confirming the disallowance of bad debts of Rs. 17,625/- claimed by the respondent Under Section 36(1)(vii) of the Act.
8. We have heard both the sides on this issue and have gone through the facts. The assessee rendered professional services to Shri S. Koure in respect of which a sum of Rs. 17,625/- was receivable by the assessee from the aforesaid Shri Koure. On the ground that this amount had become irrecoverable, the same was written off by the assessee in the books of account and deduction was claimed Under Section 36(1)(vii) of the IT Act. The AO disallowed the claim on the ground that the writing off was not bona fide as in subsequent year the assessee had professional dealings with the person and there is no question that the debt had become irrecoverable. The ld. CIT(A) concurred with the AO.The ld. CIT(A) has referred to the Bombay High Court decision in the case of Hirji 120 ITR 792. The ld. CIT(A) has observed that it must be established by the assessee that there is material on the basis of which the assessee was in a position to form a bona fide belief that the amount was not recoverable. The ld. CIT(A) observed that the assessee was having dealings with Shri Koure in the subsequent years and therefore the writing off of this amount was not bona fide. No material has been placed before us to controvert the finding of the ld.CIT(A). There is no evidence or material to show that Shri Koure refused to make payment of the aforesaid amount or there was any dispute with regard to such payment. Considering the facts, the order of the ld. CIT(A) on this issue is confirmed.
The ld. CIT(A) erred in not entertaining the ground of appeal relating to levy of interest Under Section 234C as not maintainable.
He further erred in not directing the AO to delete the same. The respondent denies its liability for the said interest, which is not chargeable on the facts and in the circumstances of the case.
10. We have heard both the sides and have gone through the facts. The ld. CIT(A) did not admit the relevant ground of appeal raised before him with the following observations contained at Para 15 of his order: The sixth ground of appeal of the appellant is against the charging of interest Under Section 234C of the IT Act. The appellant has denied its liability to the charge of interest. No appeal is provided Under Section 246A against levy of interest. The right to appeal arises due to the decision in the case reported in 160 ITR 961 (SC). In that case the Supreme Court has opined that before taking up the matter of the charge of interest in appeal, the assessee should approach the AO for waiver/reduction of interest. As this has not been done, the appeal at this stage is not maintainable. This ground of appeal is, therefore, not admitted.
11. The ld. counsel for the assessee submitted before us that the ground of appeal raised was legally maintainable as the assessee was denying its liability for charge of interest Under Section 234C. It is pointed out that the instalment of advance cheques which was payable on 15.6.97 was actually paid by the assessee on 16.6.97 as 15.6.97 was being a Holiday. For this default, interest has been charged, In our view, having regard to the facts, the ld. CIT(A) should have admitted the ground of appeal and should have decided it on merits. Therefore, this issue is restored back to the ld. CIT(A) with the direction that the relevant ground may be admitted and decided on merits after allowing opportunity to the assessee.
The ld. CIT(A) erred in not entertaining the additional ground of appeal filed by the respondent to claim deduction for leave encashment liability of Rs. 5,35,791/-. He further erred in not directing the AO to allow the aforesaid liability by following the decision of the Apex Court in the case of Bharat Earth Movers Ltd. (BEML) 162 CTR 325.
13. The ld. counsel for the assessee submitted that vide letter dated 5.3.2001, the assessee had raised additional ground of appeal before the ld. CIT(A) regarding disallowance of liability for leave encashment of employees amounting to Rs. 5,35,791/-. The additional ground was raised relying on the Supreme Court decision in the case of BEML (supra). It is pointed out that the CIT(A) has not adjudicated this additional ground of appeal.
14. The contention of the ld. counsel is found to be correct. The additional ground of appeal was duly received in the office of the CIT(A) on 8.3.2001 as per the photocopy of the acknowledged letter available on record. The CIT(A) passed his order on 28.3.2001 and this additional ground of appeal had already been filed before him prior to that date. However, he failed to consider and decide the additional ground of appeal. Therefore, this issue is restored back to the ld.CIT(A) with the direction to consider the admissibility of the additional ground of appeal as per law and decide the same on merits, if admitted.
15. In the result, while the departmental appeal is dismissed, the assessee's C.O. is partly allowed.