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Unichem Laboratories Ltd. v. Dcit-33

Income Tax Appellate Tribunal

Nov 10, 2010

Judgment

Subsequent
References

CaseIQ

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Tribunal Opinion — Summary and Analysis

Factual and Procedural Background

This appeal is by the assessee against the revision order of the Commissioner of Income Tax (Appeals)-Central-VIII dated 03.01.2006 relating to assessment year 2004-2005. The assessee had filed multiple grounds of appeal challenging, among other things, notices and the assessment under section 143(3), the treatment of certain repairs and maintenance expenditure as capital rather than revenue expenditure, disallowances under section 14A (interest attributable to investments), denial or restriction of deductions under section 80HHC for export-related receipts realized after six months, classification of interest income for computing section 80HHC deduction, and the levy of interest under section 234D.

At hearing, the assessee's authorised representative (AR) did not press grounds 1 and 2 (challenging notices and procedural fairness), which were dismissed as not pressed. The Tribunal then considered the remaining grounds in sequence, heard submissions from the assessee's AR and the Departmental Representative (DR), examined the record and relevant authorities, and gave its decision on each contested issue.

Legal Issues Presented

Whether payments for replacement/installation of a hot-water pipeline and associated fittings to an air-conditioning system should be treated as capital expenditure (and disallowed) or as revenue expenditure under repairs and maintenance (and allowable under section 37(1)).
Whether interest expense should be disallowed under section 14A as attributable to investments, and whether the assessee established that investments were made from its own funds (so as to avoid proportionate disallowance).
Whether deduction under section 80HHC is maintainable for export proceeds realized after six months where extension of time was granted by an authorised dealer (Bank of India) pursuant to an RBI circular.
Whether interest income of Rs. 83,57,352 should be treated as business income or income from other sources for computing deduction under section 80HHC, and the extent to which such interest income is to be excluded when computing business profits for section 80HHC.
Whether interest under section 234D is leviable for the assessment year in question.

Arguments of the Parties

Appellant's (Assessee's) Arguments

Repairs vs. capital: The assessee argued that expenditures on replacement of old pipelines (hot-water/air-conditioning pipeline) at the factory (set up in Goa in 1996) were replacement works for existing pipelines and not new installations; thus no new asset was created and the expenditure should be revenue expenditure under repairs and maintenance. The assessee relied on invoices (paper book pages 35–37) and the decision of the Allahabad High Court in Commissioner of Income-Tax v. Renu Sagar Power Co. Ltd. (2008) 298 ITR 94 (All).
Applicability of Explanation to section 31: Alternatively, the assessee submitted that even if part of the expenditure were capital in nature, the Explanation to section 31 (introduced w.e.f. 1.4.2004) was not applicable to the assessment year under consideration, so the expenditure cannot be disallowed on that ground.
Section 14A (interest on investments): The assessee contended that investments in shares/units/mutual funds were made from its own capital and reserves (accumulated profits) and not from borrowed funds, and that sufficient non-interest-bearing funds were available for such investments. The assessee also pointed out that some investments were in foreign shares whose dividends are taxable, and that the assessee had itself disallowed Rs. 1,30,307 under section 14A previously.
Section 80HHC (extension of time): The assessee argued that the Bank of India, as authorised dealer who handled export documents, granted extension of the period of realization under the RBI circular dated 28.01.2002; therefore export proceeds realized after six months but within the authorised extension should qualify for deduction under section 80HHC.
Interest classification for 80HHC: The assessee submitted that if interest income were to be treated as income from other sources, then at most 90% (rather than 100%) should be excluded — arguing by analogy that 10% ought to be allowed as attributable expenses. The assessee relied upon a Tribunal order (Creation by Shangar v. DCIT).
Section 234D: The assessee relied on tribunal jurisprudence to contest applicability of section 234D for the assessment year in question.

Respondent's (Revenue's) Arguments

Repairs vs. capital: The DR argued that installation of a new pipeline amounts to bringing into existence a new capital asset and confers an enduring benefit; the pipeline is part of plant and machinery and therefore capital in nature. The DR relied on the findings of the lower authorities.
Section 14A: The DR submitted that the assessee failed to establish a nexus between its own funds and the investments; funds were in a common pool and the assessee did not produce evidence to show borrowed funds were not used for investments. The AO's apportionment on average cost basis was therefore justified.
Section 80HHC extension: The DR argued that the Bank of India was not competent to grant extension and that only the Reserve Bank of India (RBI) was competent as per Explanation to section 80HHC(2)(a); the DR also pointed out that the RBI circular permits extension subject to a threshold (invoice value not exceeding US $100,000) and other conditions.
Interest classification for 80HHC: The DR contended that when interest income is treated as income from other sources, there is no provision for excluding only 90%; 100% of such interest income must be excluded from business profits for section 80HHC calculation and any actual expenses incurred in earning that income is allowable under section 57.
Section 234D: The DR relied on the lower authorities' orders supporting levy of section 234D (though ultimately the Tribunal considered a Special Bench decision to the contrary for this assessment year).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Renu Sagar Power Co. Ltd. (2008) 298 ITR 94 (All)	Relied upon by the assessee to support the contention that replacement works may be treated as revenue repairs rather than capital expenditure.	The assessee relied on this decision; the Tribunal examined the factual nature of the pipeline replacement and, on those facts and statutory timing of Explanation to section 31, allowed the repair claim. The Tribunal's decision was fact-driven and did not rest solely on this precedent.
Commissioner Of Income-Tax v. Sridev Enterprises (192 ITR 165)	Relied upon by the assessee in contesting disallowance under section 14A (to support its position about availability/use of own funds).	The assessee relied on this authority; the Tribunal noted the reliance but found the assessee had not established the requisite nexus and remitted the issue for verification in view of a more recent authority (Godrej & Boyce).
Godrej & Boyce Mfg. Co. Ltd. v. Dy. Commissioner of Income Tax (234 DTR (Bom) 1)	Referred to as a recent decision relevant to the apportionment/approach under section 14A.	The Tribunal directed that the AO should examine and verify the section 14A issue in the light of this decision and decide after giving the assessee a reasonable opportunity of being heard; accordingly the matter was remitted to the AO for fresh consideration.
Creation by Shangar v. DCIT (ITA No. 4808/Mum/06, order dated 3.11.2008)	Relied upon by the assessee in relation to the contention that only 90% of certain "independent incomes" should be excluded (analogy used in interest classification argument).	The Tribunal noted the reliance but distinguished and followed the Supreme Court authority in CIT v. K. Ravindranathan Nair; the Tribunal did not accept the assessee's submission to limit exclusion to 90% when interest is treated as income from other sources.
Hero Exports v. CIT (295 ITR 454 (SC))	Cited in arguments and discussion relating to apportionment/reduction of indirect costs in the context of section 80HHC; Court's earlier holding concerned reduction of indirect costs for incentive/computation issues.	The Tribunal observed that Hero Exports did not directly address apportionment where interest is treated as income from other sources and therefore was distinguishable for the issue before the Tribunal.
CIT v. K. Ravindranathan Nair (2007) 295 ITR 228 (SC)	Clarified treatment of "independent income" (including interest) under clause (baa) to the Explanation to section 80HHC — namely that 90% of such independent incomes is to be reduced from gross total income where they form part of business profits and are treated as business income.	The Tribunal applied and followed this Supreme Court decision to hold that: if interest income is treated as business income, 90% is to be excluded as per clause (baa); if interest income is treated as income from other sources, then 100% must be excluded from business profits for section 80HHC and only actual expenditure attributable under section 57 is allowable.
Commissioner of Income Tax, Coimbatore v. Lakshmi Machine Works (2007 (6) Scale 168)	Referenced in the explanation from Ravindranathan Nair regarding items that distort total turnover (example of indirect taxes not being included in total turnover).	The Tribunal cited the discussion in Ravindranathan Nair (which itself cites Lakshmi Machine Works) in its reasoning on how independent incomes are to be treated in the section 80HHC computation.
Ekta Promotors Private Limited ((2008) 117 TTJ Delhi 289) — Special Bench	Held that provisions of section 234D are applicable only with effect from the date of amendment in the statute (i.e., not applicable retrospectively to the assessment year in question).	The Tribunal followed this Special Bench decision and held that section 234D was not applicable for the assessment year under consideration; the issue was therefore decided in favour of the assessee.

Court's Reasoning and Analysis

The Tribunal considered each ground with reference to the record, the submissions of the parties, and relevant authorities. The reasoning, in sequence, is summarized below exactly as articulated in the opinion:

Grounds 1 & 2 (Procedural challenges)

The assessee did not press these grounds at the hearing. The Tribunal dismissed grounds 1 and 2 as not pressed.

Ground 3 (Repairs & Maintenance v. Capital Expenditure)

The AO had treated certain amounts debited to repairs as capital expenditure, making an addition (net Rs. 1,72,108 after depreciation). The CIT(A) confirmed the disallowance. The Tribunal observed that both AO and CIT(A) had not made detailed findings on whether the relevant work was replacement of an existing pipeline or creation/installation of a new plant/machinery. The Tribunal analysed:

The pipeline formed part of an air-conditioning system and, by itself, could not function as plant or machinery or enhance manufacturing capacity.
The Explanation to section 31 (which alters treatment of capital/revenue expenditure) was not applicable for the assessment year in question because it was introduced with effect from 1.4.2004; therefore it could not be used to disallow expenditure in this assessment year.
The replacement constituted part replacement arising from accumulated repairs over years and did not confer an enduring benefit or enhance capital asset; on those facts the expenditure was revenue in nature.

Based on the invoices and the above analysis, the Tribunal allowed the repairs claim as business expenditure under section 37(1) and set aside the lower authorities' orders on this issue.

Grounds 4 & 5 (Disallowance under section 14A)

The AO had apportioned interest expense to investments by computing an average rate (4.36%) and disallowing proportionate interest; CIT(A) confirmed. Before the Tribunal the assessee claimed investments were funded from its own capital/reserves and that borrowed funds were used for business. The Tribunal found:

The assessee had not satisfactorily established availability and usage of its own funds for the investments; records did not clearly prove the nexus between own funds and investments.
The assessee raised the argument about some investments being in foreign shares (dividends taxable) for the first time before the Tribunal; this requires examination by the AO.
In view of a recent decision (Godrej & Boyce), the issue needed verification at AO level.

Consequently the Tribunal remitted the matter to the AO with directions to examine and verify the issues in light of the Godrej & Boyce decision and to give the assessee a fair opportunity of being heard. The Tribunal recorded the grounds as "allowed for statistical purposes" while directing remand for further adjudication.

Grounds 6 & 7 (Deduction under section 80HHC — late realization / extension)

The AO disallowed a revised claim for deduction under section 80HHC in respect of proceeds realized after six months on the ground that only the Reserve Bank of India (RBI) could grant extension per the Explanation to section 80HHC(2)(a). CIT(A) concurred.

The assessee produced a Bank of India certificate and relied on RBI circular dated 28.01.2002 that authorised authorised dealers (who handled the export documents) to grant extensions under specified conditions. The Tribunal analysed the circular's conditions: extension allowed where invoice value does not exceed US $100,000 (and other conditions about reasons beyond control, declaration to realize proceeds within extended period, maximum extension etc.). The Tribunal found:

By virtue of the RBI circular, the Bank of India (the authorised dealer that handled the assessee's documents) was competent to grant extension subject to the circular's conditions.
The extension letter dated 15.09.2003 showed details of invoices for which extension was granted; however one invoice (serial no. 10, invoice no. 62242) exceeded US $100,000 and thus was in contravention of the RBI circular.
For all other invoices where extension complied with the circular, the AO was directed to consider the assessee's claim and allow deduction under section 80HHC if other conditions of the circular were satisfied.

(The opinion contains an express direction to the AO to consider and allow where conditions are met. Elsewhere in the order the Tribunal records that grounds 6 and 7 are dismissed — the operative direction, however, is that the AO must verify compliance with the RBI circular and grant relief only where the circular's conditions are satisfied. The Tribunal thus left substantive adjudication on qualification for deduction to the AO after verification.)

Ground 8 (Classification of interest income for section 80HHC)

The AO treated interest income of Rs. 83,57,352 as income from other sources and excluded it from business profits for section 80HHC computation. The assessee argued (by analogy) that only 90% ought to be excluded (allowing 10% as attributable expenses), relying on a Tribunal decision (Creation by Shangar v. DCIT).

The Tribunal examined the legal position and relied on the Supreme Court decision in CIT v. K. Ravindranathan Nair (2007) 295 ITR 228 (SC). The Tribunal's analysis concluded:

If interest income is treated as part of business profits (i.e., business income), clause (baa) to the Explanation to section 80HHC applies and 90% of such independent income is to be reduced from gross total income for computing business profits, and such amount is included in total turnover for the formula under section 80HHC.
If interest income is treated as income from other sources, then 100% of that income must be excluded from business profits for section 80HHC (and such income is not included in total turnover). In that case there is no deeming fiction to allocate expenses by applying the clause (baa); instead actual expenses for earning other source income are allowable under section 57 (and cannot be restricted to 10% by deeming).

Applying Ravindranathan Nair, the Tribunal decided the issue against the assessee: where the AO and CIT(A) had treated the interest as income from other sources, 100% exclusion was appropriate and the assessee's argument for limiting exclusion to 90% was rejected.

Ground 9 (Interest under section 234D)

The Tribunal observed that the question of applicability of section 234D for the assessment year was covered by the Special Bench decision in Ekta Promotors Pvt. Ltd. (2008) 117 TTJ (Del) 289, which held that section 234D applies only with effect from the date of its amendment. Accordingly, the Tribunal held section 234D was not applicable for the assessment year under consideration and decided this issue in favour of the assessee.

Holding and Implications

PARTLY ALLOWED

Direct holdings and immediate consequences (as stated in the opinion):

Ground 3 (repairs & maintenance): Allowed. The Tribunal set aside the disallowance made by the lower authorities and held that the expenditure on pipeline replacement was revenue in nature and allowable as business expenditure under section 37(1).
Grounds 4 & 5 (section 14A): The Tribunal recorded these grounds as allowed "for statistical purposes" and remitted the matter to the AO. The AO is directed to examine and verify the relationship between funds and investments and decide the issue in the light of the Godrej & Boyce decision, after giving the assessee a fair opportunity of being heard.
Grounds 6 & 7 (section 80HHC — late realization/extension): The Tribunal directed the AO to consider the assessee's claim in view of the RBI circular dated 28.01.2002 and allow deduction for invoices where the authorised-dealer extension complied with the circular's conditions; however, it identified one invoice where the extension contravened the circular (invoice exceeding US $100,000) and that invoice's extension was not in conformity with the circular. (The opinion later records that grounds 6 and 7 are dismissed; the operative direction remains that the AO must verify compliance with the circular and allow or reject accordingly.)
Ground 8 (classification of interest income for section 80HHC): Decided against the assessee. Where interest is treated as income from other sources, 100% of such interest must be excluded from business profits for section 80HHC; if treated as business income then 90% exclusion under clause (baa) would apply. The Tribunal applied the Supreme Court decision in CIT v. K. Ravindranathan Nair to reach this conclusion.
Ground 9 (section 234D): Decided in favour of the assessee. Following the Special Bench in Ekta Promotors, the Tribunal held that section 234D is not applicable for the assessment year under consideration.

Broader implications: The Tribunal's order is largely fact-specific (particularly the repairs vs. capital issue and the RBI-circular-related verification of extensions). The Tribunal applied binding Supreme Court authority (Ravindranathan Nair) on the treatment of independent incomes for section 80HHC computations, and followed a Special Bench on applicability of section 234D. The Tribunal also remitted the section 14A issue for reconsideration in light of a recent decision (Godrej & Boyce), thereby preserving the AO's opportunity to re-evaluate facts and nexus of funds rather than establishing a final new principle on the facts of this case.

Final disposition recorded in the opinion: "The appeal of the assessee is partly allowed."

Show all summary ...

Vijay Pal Rao, J.M:— This appeal by the assessee is directed against the revision order dated 03.01.2006 of CIT(A)-Central-VIII for the assessment year 2004-2005.

2. The assessee has raised the following grounds:

“1. The learned CIT(A) has erred in facts and in law in issuing various notices, which are illegal and bad in law. The consequential assessment order passed under section 143(3) of the Act is also illegal, bad-in-law and hence null and void;

2. The learned CIT(A) has erred in facts and in law in passing the assessment order in gross violations of principals of natural justice. The assessment order has been passed without giving proper and effective opportunity.

3. The learned CIT(A) has erred in facts and in law in and in facts in confirming the addition of Rs. 1,96,694/- made by the AO by treating repairs and maintenance expenses incurred for plant and machinery as capital expenditure instead of revenue expenditure.

4. The learned CIT(A) has erred in law and in facts in confirming the disallowance made by the AO of Rs. 4,41,045/- u/s. 14A of the Act being proportionate interest expense relatable to the investments made by the appellant.

5. The learned CIT(A) has erred in law and in facts in holding that the aforesaid interest expenditure is not allowable under any provisions of the Act.

6. The learned CIT(A) has erred in facts and in law and in facts in upholding the disallowance of deduction made u/s. 80HHC of Rs. 4,51,253/- by the learned AO

7. The learned CIT(A) has erred in facts and in law in confirming the disallowance of claim of deduction u/s. 80HHC of the Act in respect of export proceeds realized after six months from the end of the year but within the extended time period allowed bys the competent authority.

8. The learned CIT(A) has erred in facts and in law in confirming the treatment of interest income amounting to Rs. 83,57,352/- as income from other sources as against business income treated by the appellant, while commuting deduction u/s. 80HHC of the Act”.

9. The ld. CIT(A) has erred in law and in facts in levying interest under section 234D of the Act.”

3. At the time of hearing, the learned AR of the assessee stated that the assessee does not press grounds of appeal no. 1 and 2, the same may be dismissed as not pressed for which the learned DR has no objection for the request made by the learned AR. Accordingly, we dismiss the grounds of appeal no. 1 and 2 as not pressed.

4. The grounds of appeal no. 3, regarding the disallowance of repairs and maintenance expenses by treating the same as capital expenditure. The assessee claimed Rs. 116.96 lakhs as repairs to plant and machinery. The AO found that the certain amounts debited to repairs account relate to purchase of capital asset. Accordingly, the AO treated the sum of Rs. 1,96,694/- paid to United Engineers for installation of Hot water pipeline and after allowing the depreciation at the rate of 12.5%, the net addition of Rs. 1,72,108/- was made by the AO.

5. On appeal, the CIT(A) has confirmed the disallowance made by the AO vide impugned order.

6. Before us, the learned AR of the assessee has submitted that the assessee has set up the factory at Goa in the year 1996 and certain expenditures were incurred for replacement of the old pipelines which was required for air-conditioning to be supplied to the unit of manufacturing of pharmaceuticals. He has further contended that the repairs and maintenance work was carried out by United Engineers. The copies of the invoices are placed at pages 35 to 37 of the paper book. Thus, the learned AR has submitted that the said pipelines was replaced and no new installation of any machinery is undertaken by the assessee. He has further contended that by incurring the said expenditure no new asset was brought into existence and no enduring benefit is drawn by replacing the old pipeline by new pipeline. The learned AR submitted that the pipeline was used as for air-conditioned facilities. Thus, the expenditure is allowable under repairs and maintenance. He has relied upon the decision of the Hon. Allahabad High Court in the case of Commissioner Of Income-Tax v. Renu Sagar Power Co. Ltd. (2008) 298 ITR 94 (All). The learned AR has alternatively submitted that even if the repairs and maintenance involved some capital expenditure, the same cannot be disallowed because the explanation to section 31 has been brought with effect from 1.4.2004 and not applicable for the assessment year under consideration.

7. On the other hand, the learned DR has submitted that the installation of new pipeline is certainly amounts to addition of capital asset, therefore, it has brought into existence a new asset and advantage. He has further contended that the nature of pipeline and function of the pipeline clearly shows that it is a part of plant and machinery and therefore it amounts to installation of new assets. He has relied upon the orders of the lower authorities.

8. We have considered the rival contentions and relevant record. At the outset, we note that the AO has not given any finding on this issue. The AO has gone by the fact that the purchase of pipeline amounts to purchase of capital asset. The CIT(A) has also not examined this issue in respect of the replacement of the pipeline and the nature of installation of the machinery. Thus, when it is only replacement of the pipeline which is only part of the entire air-conditioning system and the pipeline itself cannot function as air-conditioning or plant and machinery, then the same cannot be said to be installation of a new asset or enhancing any manufacturing capacity of the assessee. Moreover, when the Explanation to section 31 is not applicable for the assessment year under consideration then even if any capital expenditure is incurred for the purposes of the repairs and maintenance, the same is allowable if the entire expenditure falls under the current repairs. In the case, in hand, though it is not current repairs but replacement of part of the machinery is because of accumulated repairs over the years, therefore, the same is allowance as revenue expenditure because it is not enhancement of any capital asset or giving any enduring benefit to the assessee. It is clear from the bills as referred by the AR that these expenses is regarding the pipeline and fitting of the same along with the accessories. Therefore, we are of the view that the disallowance made by the lower authorities on this account is not justified. Accordingly, we allow the claim of the aseseee on account of the said repairs and maintenance being business expenditure u/s. 37(1). We set aside the orders of the lower authorities on this issue.

9. Ground no. 3 of assessee's appeal is allowed.

10. Grounds of appeal no. 4 and 5 are regarding disallowance u/s. 14A. The AO has noted that the assessee has taken interest bearing loans and also made investment in shares in other companies. The AO has reproduced the details of share capital, reserve, surplus and loans in paragraph 4 of the assessment order which read as under

i share capital, Rs. 8,52.99 ii Reserve and surplus Rs. 80,33.38 iii loans Rs. 43,97.69

11. The assessee took the stand before the AO that the assessee utilized its own funds for the investment, wherein interest bearing funds have been utilized for the purpose of business of the assessee. The AO did not accept the contention of the assessee and disallowed the interest expenditure on average cost of common pool of funds. i.e the average rate of interests. The AO computed the average rate of interest at the rate of 4.36 per cent and thereby interest expenditure relatable to the investment of Rs. 102.07 lakhs was worked out by applying the rate at 4.36 per cent to Rs. 4,45,025/-

12. On appeal, the CIT(A) has confirmed the disallowance made by the AO.

13. Before us, the learned AR of the assessee has submitted that the assessee made investment in shares, units, mutual funds out of its own capital and reserve from the profit earned over the years. Thus, the assessee has not utilized the borrowed funds for making such investments. He has further contended that the borrowed funds were utilized for the purpose of plant and machinery and made the required repairs necessary for the business activities. He has referred the details produced before the AO regarding the availability of the assessee's own funds and submitted that the assessee was having sufficient interest free funds for making the above said investment. The learned AR further contended that out of the total investment some of the investments are in shares of the foreign companies. The dividend income of which is taxable, therefore, no deduction is called for to the extent of the investment of shares in the foreign companies. He has further contended that as regard other investments, the assessee itself has disallowed Rs. 1,30,307/- under section 14A. Moreover in the past no disallowance was made by the AO. Thus, the learned AR of the assessee has submitted that in view of the availability of the own funds for the investment and the dividend which is taxable in the case of investment in foreign companies, the disallowance is unjustified and not called for. He has relied upon the order of Hon. Karnataka High Court in the case of Commissioner Of Income-Tax v. Sridev Enterprises. reported in 192 ITR 165.

14. On the other hand, the learned DR submitted that the assessee has failed to establish the nexus of the own funds to the investment and the entire funds was in the common pool. The assessee has not produced any record to prove the nexus. The AO has given categorical finding that the assessee has failed to show that its own funds were used for investment in shares. He has relied upon the orders of the lower authorities.

15. We have considered the rival contentions and relevant record. As far as the availability of the assessee's own funds is concerned, it is clear from the record that the aseseee has not established the availability of its own fund for utilizing for investment in shares, units and mutual funds. The AO has discussed this issue in detailed. Moreover, the aseseee has used the interest bearing funds for investment and disallowed interest expenditure on is own u/s. 14A and has not clearly established that the interest bearing funds was used only for purchase of plant and machinery and working capital used for the business activities then the apportionment of the expenditure is permitted under section 14A. As regards the contention of the learned AR that some of the investments were made in the shares of the foreign companies, dividend of which are taxable. We find that the assessee raised this contention for the first time before this Tribunal and no such contention was raised before the lower authorities. Therefore, this issue needs examination and verification at the level of AO. Moreover, in view of the recent decision in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai. v. Dy. Commissioner of Income Tax, reported in 234 DTR (Bom)-1. Accordingly, we remit this issue to the record of the AO. The AO is directed to examine and verify the issue in view of the decision in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai v. Dy. Commissioner of Income Tax (supra) and decide the issue after giving fair and reasonable opportunity to the aseseee of being heard.

16. The grounds of appeal no. 4 and 5 are allowed for statistical purposes.

17. Grounds of appeal no. 6 and 7, regarding disallowance of deduction u/s. 80HHC of Rs. 4,51,253/- being late realization of the export proceeds. During the course of assessment proceedings, the assessee filed revised claim of deduction u/s. 80HHC in respect of funds realized after six months from the end of the year. The Assessee enclosed certificate of the authorized dealer i.e Bank of India, wherein it has been certified that the export bill outstanding as on 31.3.2001 were allowed extension and were subsequently received. The AO disallowed the claim of the assessee on the ground that the power to sanction the extension of time is vested with the Reserve Bank of India which is competent authority as per Explanation to Seton 80HHC (2)(a) and the assessee has not filed the permission from RBI. The AO accordingly rejected the claim of the assessee.

18. On appeal, the CIT(A) also concurred the view of the AO that the sanction should have been granted by the Reserve Bank of India which is the competent authority.

19. Before us, the learned AR has submitted that the extension of the time was allowed by the Bank of India being authorized dealer of the assessee. He has referred to Explanation to section 80HHC(2)(a) and submitted that the competent authority as per explanation means the Reserve Bank of India or such authority as authorized under any law for the time being in force for regulating the payment. He has referred the circular dated 28.1.2002 issued by the Reserve Bank of India whereby general permission has been given to the authorized dealer who has handled the export documents on behalf of the assessee to grant extension of period of realization beyond the prescribed period of six months. The learned AR of the assessee has submitted that the permission for extension of time from the authorized dealer is as per the circular of the Reserve Bank of India dated 28.01.2002, therefore, the amount realized after the time of six months is as per the extension granted is eligible for deduction u/s. 80HHC. The learned AR has also filed a copy of the circular of RBI dated 28.01.2002

20. On the other hand, the learned DR has submitted that the assessee has not filed any evidence to show that the bank of India was authorized to grant such permission. He has further pointed out that as per the circular the period of realization beyond six months can be extended, whereas invoice value does not exceed US $ 1,00,000. He has relied upon the orders of the lower authorities.

21. In the rebuttal, the learned AR has referred the letter date 15.09.2003 of the Bank of India, thereby the time limit was extended and submitted that all the details of invoice are mentioned in the said letter granting extension.

22. We have considered the rival contentions and relevant record. We find that the lower authorities have disallowed the claim of the aseseee for deduction u/s. 80HHC, in respect of export realization after time period of six months on the ground that the competent authority to grant the extension is Reserve Bank of India and not Bank of India. It is to be noted that the Reserve Bank of India vide its circular dated 28.01.2002 allowed the exporter to get the extension directly from the authorized dealer who has handled the export document without any reference to the RBI and the authorized dealer after obtaining the application from the exporter may grant extension of the period of realization beyond the period of six months from the date of export where the invoices of the export value does not exceeds US $ 1,00,000 subject to other conditions regarding delay are satisfied viz (i) that the exporter has not been able to realize the export proceeds for the reasons beyond his control, (ii) the exporter submitted a declaration that he will realize export proceeds during the extended period, (iii) the extension may be granted up to the period of three months at the time while considering the extension beyond one year from the date of export and the total export outstanding of the export should not be more than 10% of the average export realization. Thus, we are of the view that by virtue of this circular dated 28.1.2002 issued by the Reserve Bank of India, the Bank of India who was authorized dealer and handled the export documents of the assessee was competent to grant extension of time period subject to the conditions provided in the said circular. It is evident from the details of the invoices in the extension letter dated 15.09.2003 that out of 10 invoices in which the extension was granted the last invoice at serial no. 10 being no. 62242 is more than US $ 1,00,000, therefore, the extension in respect of the said invoice is in contravention of the said circular issued by the RBI dated 28.01.2002 For all other invoices, the AO is directed to consider the claim of the assessee in view of the circular dated 28.01.2002 and allow if other conditions are satisfied.

23. Grounds of appeal no. 8, regarding exclusion of interest income amounting to Rs. 83,57,352/- by treating the same income from other sources while computing the deduction u/s. 80HHCC. The AO noticed from the computation of the income for the deduction u/s. 80HHC filed by the aseseee that the profit eligible for deduction also includes the interest receipt of Rs. 83,57,352/-. The said interest income is netted off against the interest expenditure and the net resultant expenditure is deducted from the profit. Thus, the assessee has included interest income for the purpose of claiming the deduction u/s. 80HHC. The AO has treated the interest income as income from other sources and accordingly excluded the same while computing the deducting u/s. 80HHC.

24. On appeal, the CIT(A) has also confirmed the order of the AO in treating the interest income as income from other sources for the purpose of deduction u/s. 80HHC.

25. Before us, the learned AR of the assessee has submitted that the AO reduced the interest income earned; by the assessee from the profit of the business by invoking the provisions of explanation (baa) to section 80HHC. He has further submitted that the interest received on deposits kept in the bank should not be reduced from the profit of business as contemplated under the explanation (baa) to section 80HHC. The learned AR of the assessee has further submitted that at the most 90% of the interest should have been excluded instead of 100% even if the interest income was treated as income from the other sources because 10% of the same has to be excluded towards the expenses attributed to the earning of the said income. He has relied upon the order of this Tribunal in the case of Creation by Shangar v. DCIT in ITA No. 4808.Mum/06 (AY 2003-2004) order dated 3.11.2008

26. On the other hand, the learned DR has submitted that when the interest income has been treated as income from other sources then there is no provisions of exclusion of 90% of the same and the 100% of the income has to be excluded from the business income for the purposes of computation of deduction u/s. 80HHC. He has relied upon the orders of the lower authorities.

27. We have considered the rival contentions and relevant record. It is not the contention of the aseseee before us that the interest income should be treated as business income of the assessee and shall be excluded as per the provisions of clause (baa) of the explanation to the section 80HHC. The claim of the assessee before us is that despite the interest income treated as income from other sources only 90% of the same shall be excluded from the profits of business of the assessee and not the 100%. The contention of the learned AR in this respect is based on the analogy that 10% of the interest income should be treated as attributable expenditure for earning the said income. We are not convinced with the deeming provisions of the section when the interest income has been treated as income from other sources.

28. The provisions of exclusion of 90% of the expenditure from the income are only as per the clause (baa) to section 80HHC. Once, the interest income is treated as income from other sources, the provisions of clause (baa) of Explanation to S. 80HHC has no role to play when the said income falls under the provisions of section 57, no deeming fiction is applicable but the actual expenditure if any has been incurred by the aseseee for earning the income under this head “other sources” has to be allowed. In the case of Creation By Shangar v. DCIT (supra), this Tribunal has taken a view that if the interest income has treated as “business income” 90% thereof is to be excluded and if no interest income is to be treated as income from other sources 10% is to be reduced on account of attributable expenses by following the decision of the Hon. Apex Court in the case of Hero Exports reported in 295 ITR 454 (SC). It is to be noted that in the case of Hero Exports v. CIT, the issue was not apportionment of any cost on the interest income being treated as income from other sources but the issue in the said case was for reduction of indirect cost incurred for earning the incentive, commission, interest etc u/s. 80HHC 3(b) read with clause (c) to Explanation to S. 80HHC. Thus, in the said case, the issue was regarding the business income though having the independent income not the income from export but being part of the business profit of the assessee and therefore, the Hon. Apex Court has decided the issue only under the provisions of section 80HHC and from the scheme of section 80HHC. In our view, the relevant and proper decision direct on the issue is in the case of CIT v. K. Ravindranathan Nair reported in (2007) 295 ITR 228 (SC) in which vide paragraphs 18 to 22, the Apex Court held as under:

“18. In the present case the A.O had worked out Business Profits of Rs. 1,94,08,220 as gross total income on the basis of income received from cashew business (See: pages 50 and 52 of the SLP Paper book). Even according to assessees, in the above formula his Business Profits included the abovementioned processing charges. However, according to assessees, the said charges were not to be included in the total turnover. We are not inclined to accept the contention of the assessees. The above discussion indicates that the formula in Section 80HHC(3) of the I.T Act provided for a fraction of export turnover divided by total turnover to be applied to Business Profits calculated after deducting 90% of the sums mentioned in clause (baa) to the said Explanation. That, profit incentives and items like rent, commission, brokerage, charges etc. though formed part of gross total income had to be excluded as they were “independent incomes” which had no element of export turnover. That, the said items distorted the figure of export profits.

19. In our view, for the above reasons, the said processing charges, which was part of gross total income, was an independent income like rent, commission, brokerage etc. and, therefore, 90% of the said sum had to be reduced from the gross total income to arrive at the Business Profits and since the said processing charge was an important component of Business Profits, it also had to be included in the total turnover in the said formula to arrive at business profits in terms of clause (baa) to the said Explanation.

20. One point still remains for consideration. On behalf of assessees it has been vehemently urged that the above-mentioned processing charges, earned by the assessees by processing raw cashew nuts for third parties, had no nexus with the export business and, therefore, such charges were not includible in the total turnover. It was also further argued that export incentives were admissible only in respect of profits on export sales. In this connection, it was submitted that the assessees earned processing charges from an activity which had no connection with exports. According to assessees, no export turnover arose from processing of raw material by the assessees for third parties and, therefore, the said receipts did not constitute an element of total turnover. Therefore, according to assessees, the A.O had erred in including the said charges in the total turnover. According to assessees, profits derived from local sales were includible in Business Profits but not in the total turnover.

21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-1994. At that time Section 80HHC(3) of the I.T Act constituted a Code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90% of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under Section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of Section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90% of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profits computed in terms of Sections 28 to 44D of the I.T Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and “independent incomes” constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the I.T Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the government, shall not be included in the total turnover in the above formula (See: Commissioner of Income Tax, Coimbatore v. Lakshmi Machine Works - 2007 (6) Scale 168).

22. In the present case, the processing charges were included in the gross total income from cashew business. That, even according to assessee the said charges constituted an important component of gross total income from cashew business. This is not disputed. Therefore, in terms of clause (baa), 90% of the “independent income” had to be deducted from gross total income to arrive at Business Profits to which the fraction had to be applied. Since, the processing charges constituted independent income similar to rent, commission, etc., which formed part of the gross total income, the same had to be reduced by 90% as contemplated in clause (baa) to arrive at Business Profits. Therefore, the said processing charges were includible in the total turnover in the formula under Section 80HHC(3) of the I.T Act.”

29. In view of the above decision of the Hon. Apex Court in the case of Ravindranathan Nair (supra), the independent income like rent, commission, brokerage and interest etc. has to be reduced to the extent of 90% from the gross total income arrived at the business profit and the same has to be included in the total turnover in the formulae to arrive at business income in terms of clause (baa) of the said explanation. Thus, it is clear that if the interest income is treated as part of the gross total income of the business profit of the assessee then 90% of the same will be excluded from the total income as per clause (baa) of the explanation and at the same time it has to be included in the total turnover. Whereas if the said interest income has been treated under the income from other sources, then 100% of the same has to be excluded from the business profit and at the same time it has not to be included in the total turnover. As regards deeming expenditure to be allocated once the income is assessed under the head income from other sources there is no provision for allocation of the expenditure by applying the deeming fiction but whatever expenses is actually incurred for earning the said income is allowable u/s. 57. Thus actual expenditure and cannot be restricted to 10%. At the same time if no expenditure is incurred then there cannot be any allocation of any expenditure. Accordingly, we decide this issue against the assessee.

30. The grounds of appeal no. 6 and 7 are dismissed.

32. We have heard the learned AR and learned DR and considered the relevant record. We find that this issue stands covered by the decision of the Hon. Special Bench of this Tribunal in the case of Ekta Promotors Private Limited reported in (2008) 117 TTJ Delhi 289 in which it has been held that the provisions of section 234D are applicable with effect from the date of its amendment in the statute. Therefore, the same is not applicable for the assessment year under consideration. Accordingly, this issue is decided in favour of the assessee.

33. The appeal of the aseseee is partly allowed.