JVS Exports v. Asst. Commissioner of Income-tax, Circle-I, Madurai
[Citation -2019-LL-0723-91]

Citation 2019-LL-0723-91
Appellant Name JVS Exports
Respondent Name Asst. Commissioner of Income-tax, Circle-I, Madurai.
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 23/07/2019
Assessment Year 2004-05
Judgment View Judgment
Keyword Tags computation of deduction • manufacturing activity • exchange fluctuation • business activities • interest on deposit • computing deduction • eligible deduction • business of export • business income • export of goods • export business • working capital • interest income • total turnover • gross interest • margin money • export sale • depb
Bot Summary: 2.The above appeal has been admitted, on 23.06.2009, on the following substantial question of law:- Whether on the facts and in the circumstances of the case the Tribunal is right in holding that interest income assessed as business income is to be excluded from the 'profits and gains of business for purposes of Section 80HHC and if so whether the gross or net interest is excludable 3.The assessee is a firm engaged in the business of manufacture, sale and export of handloom towels and other items. 4.The assessee filed appeal before the Commissioner of Income-tax-I, Madurai ), contending that the Assessing Officer has included sales tax and excise duty as part of total turnover for the purposes of working out the eligible deduction under Section 80HHC of the Act contrary to the facts, as there was no such collection in the assessee's case. 8.Before the Tribunal, the assessee contended that the interest earned bears direct nexus with the business of the assessee and it should be treated as business income. 14.The learned counsel for the assessee has drawn the attention of this Court to a letter dated 10.03.2006, addressed by the Central Bank of India to the assessee stating that they are advancing loans to the assessee for their export business and to ensure the safety of advances, the bank diverts some of the export sale proceeds on realisation towards Fixed Deposits in the name of the assessee being additional security for the loan as has been the practice right from the beginning. In the said case, on facts, it was found that the assessee is in the business of export of goods and merchandise, the assessee was earning foreign exchange our of that export and the disputed income is earned by the assessee for its fees towards development work and the developmental work is intimately connected with the business of manufacture and sale of goods by the assessee and there is immediate nexus between the activity of export and the developmental work. 28.As pointed out by us earlier, the facts of the case are vividly clear and the Fixed Deposits have been created by the bank themselves by carving out a portion of the export sale proceeds on realisation and retaining them as Fixed Deposits in the name of the assessee to be retained by the bank as additional security for the loan availed by the assessee for their export business. 31.For the above reasons, the appeal filed by the assessee is allowed and the substantial question of law is answered in favour of the assessee.


1 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 23.07.2019 Judgment Reserved On Judgment Pronounced On 15.07.2019 23.07.2019 CORAM: HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case (Appeal) No.2079 of 2008 JVS Exports, 32, Sarojini Street, Madurai-625 002. .. Appellant/Appellant -vs- Asst. Commissioner of Income-tax, Circle-I, Madurai. .. Respondent/Respondent APPEAL under Section 260A of Income-tax Act, 1961, against order dated 29.09.2008 on file of Income-tax Appellate Tribunal Bench 'B', Chennai in I.T.A.No.1741/Mds/2007 for assessment year 2004-05. For Appellant : Mr.R.Srinivasan For Respondent : Ms.R.Premalatha, Junior Standing Counsel assisted by : Mr.M.Swaminathan, Senior Standing Counsel 2 JUDGMENT T.S.Sivagnanam, J. This appeal, filed by appellant/assessee under Section 260A of Income-tax Act, 1961 (hereinafter referred to as Act ), is directed against order dated 29.09.2008, passed by Income-tax Appellate Tribunal Bench 'B', Chennai ( Tribunal , for brevity) in I.T.A.No.1741/Mds/2007, for assessment year 2004-05. 2.The above appeal has been admitted, on 23.06.2009, on following substantial question of law:- Whether on facts and in circumstances of case Tribunal is right in holding that interest income assessed as business income is to be excluded from 'profits and gains of business for purposes of Section 80HHC and if so whether gross or net interest is excludable? 3.The assessee is firm engaged in business of manufacture, sale and export of handloom towels and other items. assessee filed its return of income for assessment year under consideration (2004- 05), on 11.10.2004, declaring total income of Rs.1,67,29,196/-, which http://www.judis.nic.in 3 was processed under Section 143(1) of Act, on 23.02.2005. case was selected for scrutiny and after hearing assessee's authorised representative, assessment was finalized under Section 143(3) of Act, on 27.12.2006, determining total income at Rs.3,01,57,640/-. 4.The assessee filed appeal before Commissioner of Income-tax (Appeals)-I, Madurai (for brevity, CIT(A) ), contending that Assessing Officer has included sales tax and excise duty as part of total turnover for purposes of working out eligible deduction under Section 80HHC of Act contrary to facts, as there was no such collection in assessee's case. It was further contended that Assessing Officer has excluded gross interest receipts assessed under head profits and gains of business which has nexus with export activity and which has been netted by assessee. Further, Assessing Officer has denied relief under Section 80HHC of Act in respect of export incentives like DEPB without appreciating law and facts of case while assessee has incurred loss on its transfer. It was further contended that Assessing Officer has included quota sales which were wrongly admitted as coming under Section 28(iiia) to 28(iiic) while excluding items under Clause (baa) under Explanation to Section 80HHC. With above, Assessing Officer has computed total turnover, which is not reconcilable with figures submitted in this http://www.judis.nic.in 4 regard. 5.Before CIT(A), it was argued that Assessing Officer erred in not netting interest receipts and interest payments especially when both have nexus with export activity. Assessing Officer failed to note that such netting has been upheld by Tribunal in Lalsons Enterprises vs. DCIT reported in [2004] 89 ITD 25 (SB) Delhi and explained in DCIT vs. Paramount Trading Corporation reported in [2006] 98 ITD 77 (TM) Delhi. decisions relied on by Assessing Officer were distinguished as being inapplicable to facts of assessee's case. assessee placing reliance on decision in CIT vs. A.S.Nizar Ahmed & Co., reported in [2003] 259 ITR 244 (Mad.), contended that in said decision, it has been held that where there is link with export business, interest has to be netted. 6.With regard to first ground, viz., against inclusion of sales tax and excise duty as part of total turnover for purpose of computation of deduction under Section 80HHC, assessee succeeded before CIT(A). 6.1. With regard to second ground, against not netting interest receipts and interest payments while computing deduction under http://www.judis.nic.in 5 Section 80HHC, CIT(A) applied decision in case of CIT vs. Chinnapandi reported in [2006] 201 CTR 13 (Mad.) and rejected contention of assessee. 6.2. third ground with regard to decision of Assessing Officer adopting entire sale proceeds of DEPB for purpose of application of sub-Section (baa) to Explanation to Section 80HHC, CIT(A) allowed assessee's case and directed Assessing Officer to modify computation, accordingly. 7.Thus, assessee is before us only with regard to issue whether Tribunal is right in holding that interest income assessed as business income is to be excluded from profits and gains of business for purposes of Section 80HHC and if so whether gross or net interest is excludable. 8.Before Tribunal, assessee contended that interest earned bears direct nexus with business of assessee and it should be treated as business income. Further, only net interest is to be considered, since in assessee's case, no interest was negative figure and no amount should be considered for exclusionary purpose. http://www.judis.nic.in 6 9.The Tribunal applied decision in case of Dollar Apparels vs. ITO reported in [2007] 294 ITR 484 (Mad.) and held that interest on deposit is not entitled for special deduction under Section 80HHC, as it bears no nexus with export earning. 10.Mr.R.Srinivasan, learned counsel appearing for assessee contended that Tribunal ought to have noted that since deposit made with bank is obligatory in terms of certificate issued by bank, interest income has to be treated as business income and decision in case of A.S.Nizar Ahmed & Co. (supra) ought to have been applied by Tribunal. In support of his contention, learned counsel placed reliance on decisions in CIT vs. Bangalore Clothing Co., reported in [2003] 260 ITR 371 (Bom.); CIT And Anr. vs. Motor Industries Co. Ltd., reported in [2011] 331 ITR 79 (Kar.); Aurobindo Pharma Ltd., vs. CIT reported in [2015] 370 ITR 216 (T&AP); CIT vs. TTK LIG Ltd., reported in [2018] 409 ITR 390 (Mad.); CIT vs. Abdul Rahman Industries reported in [2007] 293 ITR 475 (Mad.); and Arul Mariammal Textiles Ltd., vs. Assistant Commissioner of Income-tax, Coimbatore reported in [2018] 97 taxmann.com 298 http://www.judis.nic.in 7 (Mad.). 11.Ms.S.Premalatha, learned Junior Standing Counsel, assisted by Mr.M.Swaminathan, learned Senior Standing for Revenue sought to sustain order passed by Tribunal by placing reliance on decisions in Rani Paliwal vs. CIT reported in [2004] 136 Taxman 135 (Punj. & Har.); CIT vs. Liberty Footwear Co., reported in [2006] 287 ITR 339 (Pun. & Har.); and K.S.Subbiah Pillai & Co. (India) (P.) Ltd., vs. CIT reported in [2004] 134 Taxman 735 (Mad.). 12.Alternatively, it was submitted that facts need to be examined in appropriate manner and for which purpose, Court may remand matter for fresh consideration as was done in case of CIT vs. M/s.Rane Engine Valves Ltd. [T.C.A.No.1168 of 2008, dated 19.11.2018]. 13.Before assessing Officer, assessee contended that all deposits made with bank were from and out of export sale proceeds, deposits were made for availing working capital loan from Central Bank of India, all deposits were marked as collateral security http://www.judis.nic.in 8 and in course of export business, which is only business of assessee, it availed loans and paid interest and while paying interest on loans taken for export business, interest on these deposits are to be reckoned and net only is interest to be effectively paid on loans obtained. This argument of assessee was not accepted by Assessing Officer on ground that any income to be called as business income and to qualify for deduction under Section 80HHC, should have direct nexus with export activity and even though Fixed Deposits were kept for business and interest is in nature of receipt, it does not qualify to be called business income. 14.The learned counsel for assessee has drawn attention of this Court to letter dated 10.03.2006, addressed by Central Bank of India to assessee stating that they are advancing loans to assessee for their export business and to ensure safety of advances, bank diverts some of export sale proceeds on realisation towards Fixed Deposits in name of assessee being additional security for loan as has been practice right from beginning. 15.The question would be as to whether this interest has any direct nexus to business activity of assessee, viz., exports. http://www.judis.nic.in 9 16.In Bangalore Clothing Co. (supra), similar issue arose for consideration and Court held that Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc., and these items of income have to be seen in context of business activity of assessee. It was pointed out that Assessing Officer will have to ascertain whether receipt of interest, commission, labour charges, etc., were part of operational income. It was further pointed out that Court cannot lay down any standard test for deciding what would constitute operational income and Department will have to consider memorandum of articles of association of company, nature of business, nature of activity and such other tests. Further, Department will also have to ascertain as to what is dominant business of company and whether receipts like interest, commission, etc., accrue as part of main business activity or whether they accrue out of incidental business. In said case, Tribunal, on facts, found that job processing activity done by assessee was linked to manufacturing activity and affirmed finding of Tribunal holding that 90 per cent of labour charges ought not have been excluded from such business profits while computing deduction under Section 80HHC. http://www.judis.nic.in 10 17.In Motor Industries Co. Ltd. (supra), substantial question of law which was considered was whether income received by assessee towards developmental work in course of its export business which is different from income arising out of business of export out of India of any goods are merchandise is liable to be reduced by 9 per cent as provided under Clause (1) of Explanation (baa) to Section 80HHC of Act. It was held that in computing profits of business for purpose of Explanation (baa), incomes which are deductible are those which are expressly prescribed in aforesaid provision and which are similar in nature. It was further held that if income is derived out of activity which would have direct and immediate nexus to activity of export, then such income is not deductible from said profits of business under aforesaid provisions. It was pointed out that expression any other receipt of similar nature has to be understood in context of words proceeding said expression, viz., brokerage , commission , interest , rent or charges , such receipts have no nexus with income earned by way of foreign exchange. It was further pointed out that every receipt is not income and every income would not necessarily include element of export turnover. Thus, basic requirement of Section 80HHC is earning in foreign exchange and retention of profits for export business and such benefit should go only exporters and should not http://www.judis.nic.in 11 be misused in getting benefit when there is no element of export involved in income. In said case, on facts, it was found that assessee is in business of export of goods and merchandise, assessee was earning foreign exchange our of that export and disputed income is earned by assessee for its fees towards development work and developmental work is intimately connected with business of manufacture and sale of goods by assessee and there is immediate nexus between activity of export and developmental work. Thus, it was held that Tribunal was justified in holding that said consideration received for developmental work is not liable to be deduced under Clause (baa) in computing profits of business. 18.Similar view was taken in Aurobindo Pharma Ltd. (supra) by placing reliance on decision in Bangalore Clothing Co. (supra). 19.In TTK LIG Ltd. (supra), it was held that Tribunal was right in holding that exchange fluctuation, provision written back should be treated as income derived out of business for computation of deduction under Section 80HHC. 20.In Abdul Rahman Industries (supra), substantial question of law, which fell for consideration was whether assessee was entitled http://www.judis.nic.in 12 to deduction under Section 80HHC in respect of sum being unclaimed balances written back in profit and loss account. case was decided in favour of assessee holding that there were credits appearing in books on basis of purchase of items from various suppliers and these suppliers were not paid and these unclaimed credit balances were brought to profit and loss account and had emanated from trading transactions only and transactions were connected or closely linked with assessee's business activities and receipts had arisen only out of ordinary trading transactions and hence were rightly assessed under head Business and assessee was entitled to benefit under Section 80HHC. 21.In Arul Mariammal Textiles Ltd. (supra), it was held that interest on margin money by way of Fixed Deposit kept with assessee's banker so as to enable bank to open foreign letter of credit which was essential for purpose of import of critical components for carrying on business of assessee was eligible for deduction under Section 80-IA. 22.As pointed out by us earlier, bank from which assessee availed loans for their export business, in no uncertain terms had mentioned that from and out of export sale proceeds, they (bank) http://www.judis.nic.in 13 would divert some of it upon realisation of sale proceeds towards Fixed Deposits in name of assessee being additional security for loans. Thus, it is seen that conversion of portion of export sale proceeds on realisation as Fixed Deposits was not on volition of assessee, but by unilateral act of bank over which, assessee had no control. Furthermore, bank had made it explicitly clear that Fixed Deposits are created for being treated as additional security for loans availed by assessee. Revenue does not dispute fact that loans availed by assessee was for their export business. 23.In such circumstances, there can be no dispute to fact that these receipts have direct and immediate nexus to activity of export done by assessee and in such circumstances, said income is not deductible from said profits of business. Revenue cannot dispute immediate nexus between activity of export and creation of Fixed Deposits to be retained by bank as additional security towards loan availed for export business. 24.In Rani Paliwal (supra), relied on by Revenue, question was whether Tribunal was legally correct in holding that claim for deduction in respect of income from Fixed Deposit Receipts (FDRs) was not substantial, despite contrary and consistent view having been http://www.judis.nic.in 14 expressed by Bombay High Court in cases of CIT vs. Paramount Premises (P.) Ltd., reported in [1991] 190 ITR 259 (Bom); and CIT vs. Nagpur Engg. Co. Ltd., reported in [2000] 245 ITR 806 against which, Special Leave Petition of Department was dismissed. 25.On perusing judgment, we find issue before Tribunal in said case was not as to whether interest income received from Fixed Deposits had any bearing on business of assessee. In any event, appeal filed by assessee was dismissed on ground that there is no substantial question of law arising in appeal. Therefore, this decision cannot be cited as precedent by Revenue. 26.The decision in case of Rani Paliwal (supra) was followed in Liberty Footwear Co. (supra) and on facts, it was found that in said case also, there is no contention placed before Court as to whether interest income had direct nexus with business activity of assessee. 27.In Rane Engine Valves Ltd. (supra), Court while considering as to whether deposits made by assessee with banks had immediate nexus with business of assessee, found that facts were not placed before Court and therefore, opined that http://www.judis.nic.in 15 matter requires to be re-adjudicated afresh for which purpose, matter was remanded to Assessing Officer to take fresh look into matter. 28.As pointed out by us earlier, facts of case are vividly clear and Fixed Deposits have been created by bank themselves by carving out portion of export sale proceeds on realisation and retaining them as Fixed Deposits in name of assessee to be retained by bank as additional security for loan availed by assessee for their export business. 29.As mentioned earlier, conversion of portion of sale proceeds as Fixed Deposits was done by bank themselves and not on volition of assessee. Therefore, we are fully convinced that transaction was connected and closely linked with assessee's business activity. 30.Thus, we hold that Tribunal erred in dismissing assessee's appeal. 31.For above reasons, appeal filed by assessee is allowed and substantial question of law is answered in favour of assessee. No costs. http://www.judis.nic.in 16 (T.S.S., J.) (V.B.S., J.) 23.07.2019 Index : Yes/No Speaking/Non-Speaking Order abr To 1.The Assistant Commissioner of Income-tax, Circle-I(i/c), Madurai. 2.The Commissioner of Income-tax (Appeals)-I, Madurai. 3.The Income-tax Appellate Tribunal Bench 'B', Chennai. T.S.Sivagnanam, J. and V.Bhavani Subbaroyan, J. (abr) Pre-delivery Judgment made in Tax Case (Appeal) No.2079 of 2008 http://www.judis.nic.in 17 23.07.2019 http://www.judis.nic.in JVS Exports v. Asst. Commissioner of Income-tax, Circle-I, Madurai
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