CG INTERNATIONAL (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2006-LL-1205-3]

Citation 2006-LL-1205-3
Appellant Name CG INTERNATIONAL (P) LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 05/12/2006
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags convertible foreign exchange • export oriented undertaking • export oriented unit • interest expenditure • foreign currency • export business • interest earned • interest income • central excise • interest paid • margin money • sales-tax
Bot Summary: The assessee claimed that during the year it had earned total income of Rs. 2,15,28,067 and the entire income was exempt from tax under s. 10B because the assessee was 100 per cent Export Oriented Unit. 12th Feb., 2003 stated that the assessee had issued bank guarantees for customs, central excise, sales-tax and MMTC. Against the bank guarantees the assessee had to place fixed deposit receipts with the bank on which interest was earned by the assessee during the ordinary course of assessee s business of export. The assessee argued that as against the interest income of Rs. 1,78,085 the assessee had paid interest of Rs. 2,50,028 to Navi Mumbai Municipal Corporation by way of Cess on import of raw material. The amount of Rs. 1,01,894 was not required to be netted against interest expenditure incurred by the assessee and the entire amount was chargeable to tax as Income from other sources not qualified for deduction under s. 10B. Still aggrieved the assessee is in appeal before us. During the course of hearing before us the learned counsel for the assessee argued that both interest income of Rs. 76,191 and Rs. 1,01,894 had been earned by the assessee during the ordinary course of its business. The income derived by the assessee from its hundred per cent export oriented undertaking is income from export of gold, silver and platinum studded jewellery manufactured by the assessee. Interest income earned by the assessee cannot be said to be export income of the assessee s 100 per cent EOU. We are therefore, of the view that even if such interest income is required to be assessed under the head Profits and gains of interest income is required to be assessed under the head Profits and gains of business or profession the assessee would in that case be not entitled to exemption under s. 10B of the Act.


This appeal has been filed by assessee on 21st Feb., 2005 against order of learned CIT(A)-X, Mumbai dt. 13th Jan., 2005 in case of assessee in relation to assessment order under s. 143(3) for asst. yr. 2001-02. only ground of appeal taken by assessee in this appeal is as follows: "The learned CIT (A) erred in holding that interest earned on funds retained in Exchange Earners Foreign Currency Account does not represent income derived from business of exports and thereby earned in directing that interest amounting to Rs. 1,01,894 be taxed under head "Income from other sources". Facts of case leading to this dispute briefly are that assessee company was engaged in business of manufacturing of plain and studded jewellery and export thereof. assessee claimed that during year it had earned total income of Rs. 2,15,28,067 and entire income was exempt from tax under s. 10B because assessee was 100 per cent Export Oriented Unit. learned AO did not dispute that assessee was 100 per cent Export Oriented Unit. He held view that entire income earned by assessee could not be said to be profits and gains derived by 100 per cent Export Oriented Undertaking from export of articles or things. Insofar as interest income of Rs. 1,78,086 was concerned learned AO asked assessee as to why this interest income should not be assessed under head "Income from other sources". assessee in its reply dt. 12th Feb., 2003 stated that assessee had issued bank guarantees for customs, central excise, sales-tax and MMTC. Against bank guarantees assessee had to place fixed deposit receipts with bank on which interest was earned by assessee during ordinary course of assessee s business of export. assessee earned Rs. 76,191 as interest on such fixed deposits receipts. Besides being 100 per cent export oriented unit, assessee was required to maintain EEFC account with Bank of India from which assessee earned income of Rs. 1,01,894. assessee therefore, argued that entire interest income of Rs. 1,78,086 was earned during ordinary course of export business of assessee. learned AO considered these arguments of assessee and he held view that interest income was not directly generated/derived from business activities of assessee company. Interest income had been received by assessee on funds lying idle or unused in form of deposits with banks. Such interest income was assessable under head "Income from other sources". In support of these contentions learned AO placed reliance on judgments in Sterling Foods vs. CIT (1985) 47 CTR (Kar) 157: (1984) 150 ITR 292 (Kar); CIT vs. Madras Motors Ltd./M.M. Forgings Ltd. (2002) 174 CTR (Mad) 221: (2002) 257 ITR 60 (Mad); CIT vs. Pandian Chemicals Ltd. (1998) 147 CTR (Mad) 5: (1998) 233 ITR 497 (Mad) and CIT vs. N.S.C. Shoes (2003) 179 CTR (Mad) 524: (2002) 258 ITR 749 (Mad). learned AO, therefore, assessed this sum of Rs. 1,78,086 as assessee s income from other sources and accordingly, did not hold same as exempt under provisions of s. 10B of Act. During course of hearing before learned CIT(A) assessee stated that it was 100 per cent Export Oriented Unit (EOU). assessee was manufacturing gold, silver and platinum studded jewellery at its premises situated in Navi Mumbai which was outside Special Economic Zone (SEZ). As t h e assessee s manufacturing activity was outside SEZ assessee was required to furnish bonds and guarantees to Customs and Central Excise Departments. It therefore became necessary to give bank guarantees and for that purpose banks required assessee to take fixed deposits with them. Interest income of Rs. 76,191 arose to assessee in these special circumstances. Likewise interest income earned on Export Realisations Deposit in EEFC account was also generated out of business activities relating to manufacture and export of goods by assessee. assessee argued that as against interest income of Rs. 1,78,085 assessee had paid interest of Rs. 2,50,028 to Navi Mumbai Municipal Corporation by way of Cess on import of raw material. assessee paid interest of Rs. 20,728 to ABN Amro Bank for availing vehicle loan. assessee argued that interest paid was in connection with business and therefore interest paid was required to be adjusted against interest earned. If interest earned was netted against interest paid there was only negative amount of interest expenditure. In other words there was no income that could be assessed under head "Income from other sources". In support of these contentions of assessee placed reliance on decisions in Asstt. CIT vs. Sharda Gums & Chemicals (2000) 66 TTJ (Jp) 256: (2001) 76 ITD 282 (Jd); Dy. CIT vs. Diamond Creek (2002) 82 ITD 291 (Mumbai); Leatherage vs. ITO (2003) 78 TTJ (Luck) 937: (2003) 86 ITD 482 (Luck); Pink Star vs. Dy. CIT (2000) 66 TTJ (Mumbai) 885: (2000) 72 ITD 137 (Mumbai) and Alfa Laval India Ltd. vs. CIT (2004) 186 CTR (Bom) 390: (2003) 133 TAXMAN 740 (Bom). assessee argued that case law relied upon by AO was not concerned with question of netting out of income against credits and debits. In case of assessee there was no net interest income and there was only net interest expenditure. learned CIT(A) considered these arguments of assessee. He held that here was no dispute that there was interest income of Rs. 1,78,085. This interest income had nexus with assessee s business inasmuch as interest of Rs. 76,191 was earned on margin money deposited with bank for export. learned CIT(A) therefore held that interest income of Rs. 76,191 was assessable under head "Profits and gains of business or profession" and learned AO erred in assessing it as "Income from other sources". However, in relation to interest income of Rs. 1,01,894 earned by assessee from EEFC account learned CIT(A) held that this income had been earned because surplus funds had been kept in EEFC account. He therefore held that income of Rs. 1,01,894 was required to be taxed under head "Income from other sources". Based on this reasoning learned CIT(A) held that only interest receipt of Rs. 76,191 was required to be netted against interest paid of Rs. 2,70,756. amount of Rs. 1,01,894 was not required to be netted against interest expenditure incurred by assessee and entire amount was chargeable to tax as "Income from other sources" not qualified for deduction under s. 10B. Still aggrieved assessee is in appeal before us. During course of hearing before us learned counsel for assessee argued that both interest income of Rs. 76,191 and Rs. 1,01,894 had been earned by assessee during ordinary course of its business. Such interest income could not be separated from export income of assessee that was fully exempt under provisions of s. 10B of Act. learned counsel emphasised that expression used under provisions of s. 10B was "derived by" and not "derived from". learned counsel also kly emphasised provisions of Explanation to s. 10B(3). He pointed out that assessee s account was maintained abroad because Expln. 2 deemed deposit of EEFC account to be convertible foreign exchange received in India. For that reason also interest earned on that account had to be treated as integral part of sale proceeds received by assessee. In alternative learned counsel argued that learned CIT(A) erred in not netting interest earned by assessee from EEFC account against interest expenditure. There was no justification to assess it under head "Income from other sources". Both income had been earned by assessee in t h e ordinary course of business and represented business income of assessee. He argued that in that view of matter assessee s interest income of Rs. 1,01,894 was also to be netted against interest expenditure of Rs. 2,70,756. learned Departmental Representative kly relied upon reasoning of AO as well as learned CIT(A) that we have enumerated in foregoing paragraph. We have carefully considered rival submissions. controlling expression in s. 10B in this respect is "Profits and gains as are derived by hundred per cent export-oriented undertaking from export of articles or things or computer software". expression employed is, therefore, unmistakably "derived from" as distinguished from expression "attributable to". In instant case income earned by assessee is interest income. income derived by assessee from its hundred per cent export oriented undertaking is income from export of gold, silver and platinum studded jewellery manufactured by assessee. It cannot be said that interest income earned by assessee on its deposits with EEFC account abroad was income derived from export of articles or things or computer software. It may be that assessee deposited its export earnings only in EEFC account but fact remains that interest income is earned because assessee retained its funds deposited in EEFC account rather than because assessee operated manufacturing unit o f gold, silver or platinum studded jewellery and exported its products. Interest income earned by assessee cannot be said to be export income of assessee s 100 per cent EOU. We are therefore, of view that even if such interest income is required to be assessed under head "Profits and gains of interest income is required to be assessed under head "Profits and gains of business or profession" assessee would in that case be not entitled to exemption under s. 10B of Act. We derived support for this view held by us from judgment of Hon ble Supreme Court in case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99: (2003) 262 ITR 278 (SC). In result we do not see any infirmity in order of learned CIT(A). same is upheld and this appeal is dismissed. *** CG INTERNATIONAL (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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