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Voltas International Ltd. v. Assistant Commissioner of Income-tax
Tribunal Summary: Appeal against order dated 30.11.2005 (Assessment Year 2001-02)
Factual and Procedural Background
The assessee-company carried on businesses including project export, physical export, mechanical and electrical contracts, civil construction, rendering technical services, turnkey projects and property development. For the assessment year 2001-02 the assessee filed a return showing total income of Rs. 1,10,21,179 and book profit under section 115JB of Rs. 4,12,79,000. The Assessing Officer (AO) examined interest income shown by the assessee and treated the entire interest as income from other sources. The assessee had claimed deductions under sections 80HHB and 80HHC which were adjusted by the AO. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's treatment of interest income as income from other sources relying on several decisions. The assessee appealed to the Tribunal against the CIT(A)'s order dated 30.11.2005. The appeal raises several grounds challenging the CIT(A)'s upholding of the AO's treatment, reduction of section 80HHB claim, treatment of deputation charges and the non-consideration of a revised 80HHC claim.
Legal Issues Presented
- Whether interest income of Rs. 1,49,20,303 earned from temporary surplus funds relating to overseas projects is taxable as "income from other sources" or as "profits and gains of business or profession" (i.e., business income)?
- Whether the Commissioner of Income-tax (Appeals) erred in reducing the assessee's claim under section 80HHB by Rs. 81,17,303 in respect of interest income derived from overseas projects?
- Whether deputation charges of Rs. 2,26,328 should be treated as business income and whether 90% thereof should be reduced while computing profits for deduction under section 80HHC?
- Whether the CIT(A) erred in ignoring the assessee's revised claim for deduction under section 80HHC at Rs. 53,31,535 filed before the Assessing Officer?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee contended that certain interest receipts (interest on bank deposits and on margin money) arose from temporary surplus funds that were earmarked for overseas projects and were therefore inextricably linked with the business of executing those projects; consequently such interest should be treated as business income.
- It was pointed out that Reserve Bank of India guidelines and bank monitoring requirements prevented transfer of surplus funds from one project to another without prior approval; hence funds had to be temporarily invested in fixed deposits to keep them readily available for the project.
- For interest on bank deposits related to foreign projects the assessee relied on Bombay High Court decisions in CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 and Lok Holdings [2009] 308 ITR 356 to support the proposition that interest on short-term deposits of funds set apart for business purposes is business income.
- For interest on margin money the assessee relied on Karnataka High Court decision CIT v. Chinna Nachimuthu Constructions [2008] 297 ITR 70 and Delhi High Court decision Commissioner of Income-Tax v. Koshika Telecom Ltd. [2006] 287 ITR 479 to argue that margin money deposits, being linked to the furnishing of guarantees and credit facilities for project execution, are inextricably linked to business and produce business income.
- On the question of deduction under section 80HHB, the assessee alternatively argued that if deduction were to be disallowed in full, at least only the net interest should be excluded (i.e., an argument for allowing certain netting/exclusion while computing the deduction).
Respondent's (Departmental) Arguments
- The Departmental representative submitted that surplus funds had been invested in fixed deposits and therefore interest thereon was income from other sources.
- It was argued that idle/surplus funds invested in fixed deposits had no direct nexus with the core business activity and therefore could not be treated as business income.
- The Department pointed to project-level profit & loss accounts in the record to show that project-specific surplus funds existed and were invested.
- The Department relied on decisions including Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom.), and Commissioner of Income-Tax v. M.F.C. Industries Pvt. Ltd. [2001] 248 ITR 249 (Mad.) to support the submission that such interest income should be treated as income from other sources.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Murli Investment Company v. Commissioner Of Income-Tax [1987] 167 ITR 368 (Raj.) | Relied upon by CIT(A) in support of AO's treatment of interest as income from other sources (as cited by CIT(A)). | The CIT(A) relied on this decision to confirm the AO's treatment; listed among decisions the CIT(A) used to uphold AO. The Tribunal recorded that CIT(A) relied on it. |
| MP State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 (MP) | Relied upon by CIT(A) in support of AO's treatment (as cited by CIT(A)). | Recorded as one of the authorities on which the CIT(A) relied in confirming AO's view that interest was income from other sources. |
| Collis Line (P.) Ltd. v. CIT [1982] 135 ITR 390 (Ker.) | Relied upon by CIT(A) in support of AO's treatment (as cited by CIT(A)). | Recorded as one of the authorities used by CIT(A) to confirm AO's treatment. |
| Traco Cable Company Ltd. v. Commissioner Of Income-Tax, Ernakulam [1969] 72 ITR 503 (Ker.) | Relied upon by CIT(A) in support of AO's treatment (as cited by CIT(A)). | Recorded as one of the authorities used by CIT(A) to confirm the AO's assessment. |
| Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd. [2002] 257 ITR 60 (Mad.) | Relied upon by CIT(A) in support of AO's treatment (as cited by CIT(A)). | Recorded as an authority on which the CIT(A) relied in upholding the AO's view. |
| Commissioner Of Income-Tax v. Gimpex P. Ltd. [2004] 268 ITR 377 (Mad.) | Relied upon by CIT(A) in support of AO's treatment (as cited by CIT(A)). | Recorded as one of the precedents used by the CIT(A) to confirm the AO's decision. |
| CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom.) | Relied upon by CIT(A) and cited by Departmental representative for treating interest as income from other sources. | Recorded as relied upon by the CIT(A); the Department also referred to this decision in submissions. |
| CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bombay High Court) | Authority for holding that interest on short-term deposits of money kept apart for business purposes is income from business. | The Tribunal found the present facts akin to Indo Swiss Jewels and relied on it to hold that interest on certain deposits (temporary surplus funds meant for projects) was business income. |
| Commissioner Of Income-Tax v. Lok Holdings [2009] 308 ITR 356 (Bombay High Court) | Authority for the proposition that interest arising from business activity (deposits of receipts in course of business) is business income. | The Tribunal regarded Lok Holdings as supporting the assessee and used it to conclude that interest on funds kept readily available for projects is inextricably linked to business and assessable as business income. |
| CIT v. Chinna Nachimuthu Constructions [2008] 297 ITR 70 (Karnataka High Court) | Relied upon by assessee for proposition that margin money deposits can be inextricably connected with business activities. | Cited by the assessee; the Tribunal considered it among authorities relied upon by the assessee in support of treating margin money interest as business income. |
| Commissioner Of Income-Tax v. Koshika Telecom Ltd. [2006] 287 ITR 479 (Delhi High Court) | Authority that interest on margin money (deposited in connection with furnishing guarantees/credit facilities) may be inextricably linked to business and thus business income. | The Tribunal relied on Koshika Telecom to hold that interest on margin money of Rs. 14,87,202 was assessable as business income. |
| Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (Supreme Court) | Cited by Departmental representative to support the submission that surplus funds invested in deposits may be income from other sources. | Noted by the Tribunal as part of the Department's reliance; used in Department's argument but the Tribunal evaluated facts against other authorities relied upon by the assessee. |
| Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 (Supreme Court) | Relied upon by AO in deciding that interest could not be treated as "profits and gains derived from the business" for purposes of section 80HHB (as cited by AO). | Recorded as AO's reliance; the Tribunal noted AO's reference but concluded the issue on section 80HHB was governed by Liberty India (supra). |
| Liberty India v. Commissioner Of Income Tax [2009] 317 ITR 218 (Supreme Court) | Held to have concluded the legal issue regarding whether interest derived from fixed deposits kept with bank can be treated for purposes of section 80HHB. | The Tribunal held that this Supreme Court decision concluded the issue and directed the AO to exclude only the net interest income for section 80HHB computation, applying Liberty India. |
| Commissioner Of Income-Tax v. M.F.C Industries Pvt. Ltd. [2001] 248 ITR 249 (Mad.) | Cited by Departmental representative to support submission that interest from invested surplus is income from other sources. | Noted as part of the Department's cited authorities in opposition to the assessee's claim. |
Court's Reasoning and Analysis
The Tribunal examined the parties' submissions and the record. The analysis proceeded in discrete steps corresponding to the components of the total interest income of Rs. 1,49,20,303:
- Interest on bank deposits relating to foreign projects: Rs. 66,30,101 and interest received under section 80HHC: Rs. 30,49,000 — the Tribunal accepted the assessee's factual position that these funds were temporary surplus funds earmarked for foreign projects and could not be freely transferred between projects without prior bank approval under RBI guidelines. Because the funds were kept in fixed deposits only temporarily to ensure availability for project use, the Tribunal compared the facts with Indo Swiss Jewels [2006] 284 ITR 389 and Lok Holdings [2009] 308 ITR 356. Finding the facts akin to Indo Swiss Jewels and supportive in Lok Holdings, the Tribunal concluded these amounts were "inextricably linked" to the business of the assessee and therefore assessable as business income.
- Interest on margin money relating to foreign projects: Rs. 14,87,202 — the Tribunal relied on the decision in Koshika Telecom Ltd. [2006] 287 ITR 479 (Delhi High Court), which held margin money deposited in connection with furnishing bank guarantees/credit facilities to be inextricably linked with the business activity. Observing that the interest here arose on margin money kept for availing credit facilities and project execution, the Tribunal held that this interest too was assessable as business income.
- Other interest: Rs. 37,79,000 (interest on certain bank fixed deposits, interest on income-tax refunds, and inter-corporate deposits) — the Tribunal agreed with the lower authorities that this portion was correctly treated as income from other sources. The Tribunal emphasized that mere earning of interest "in the normal course of business" does not automatically convert such receipts into business income; the key test is whether the interest is inextricably linked with the business. On the record, these other interest receipts did not meet that test.
- Deduction under section 80HHB (ground No. 2): The AO denied deduction under section 80HHB of Rs. 81,17,303 on two stated grounds: (a) that the interest was assessable as income from other sources, and (b) that interest proceeds were not "profits and gains derived from the business" as the immediate source was fixed deposits rather than the project. The AO had relied on Sterling Foods. The Tribunal, however, found that the issue was concluded by the Supreme Court decision in Liberty India [2009] 317 ITR 218. Applying Liberty India, and given that the Tribunal had held parts of the interest to be business income, the Tribunal directed the AO to exclude only the net interest income for purposes of computing the 80HHB deduction (i.e., to apply the alternate/netting argument advanced by the assessee). This resulted in partial allowance of the ground challenging the reduction of the 80HHB claim.
- Other grounds (deputation charges, revised 80HHC claim): The Tribunal noted these grounds were not pressed by the assessee and therefore dismissed them as not pressed.
Holding and Implications
CORE RULING: The appeal filed by the assessee is PARTLY ALLOWED.
Specific holdings recorded by the Tribunal:
- The Tribunal held that interest aggregating to Rs. 66,30,101 (interest on bank deposits relating to foreign projects) and Rs. 30,49,000 (interest received under section 80HHC, as addressed in the text) are assessable as business income because they were inextricably linked with the assessee's project business (relying on Indo Swiss Jewels and Lok Holdings).
- The Tribunal held that interest on margin money of Rs. 14,87,202 was assessable as business income (relying on Koshika Telecom Ltd.).
- The Tribunal upheld the treatment of other interest amounting to Rs. 37,79,000 as income from other sources.
- On the section 80HHB claim of Rs. 81,17,303, the Tribunal directed that, in view of the Liberty India decision, the Assessing Officer should exclude only the net interest income for computing the deduction (thus partly allowing Ground No. 2).
- Grounds not pressed by the assessee (including deputation charges and the revised 80HHC claim) were dismissed as not pressed.
Consequences and implications:
- Direct effect on the parties: portions of the interest income (specified above) will be assessed as business income and other interest treated as income from other sources; the Assessing Officer is directed to give effect to the Tribunal's findings and to limit the exclusion under section 80HHB to the net interest as directed.
- No broader new legal principle was announced by the Tribunal; the decision applies established authorities (Bombay High Court decisions and the Supreme Court decision in Liberty India) to the facts of this appeal. The Tribunal expressly compared the facts of this case with existing High Court and Supreme Court authorities and applied those precedents to reach its conclusions.
Order pronounced on 21st December, 2009. Result: appeal partly allowed.
S.V. Mehrotra, Accountant Member — The appeal filed by the asses-see is directed against the order dated November 30, 2005 of the learned Commissioner of Income-tax (Appeals)-XXX, Mumbai, for the assessment year 2001-02. The grounds raised by the assessee are as under :
"1.The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer that the interest income earned from temporary surplus funds relating to overseas projects amounting to Rs. 1,49,20,303 is taxable as income from other sources and not as profits and gains of business or profession.
2.The Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in reducing the appellant's claim under section 80HHB by Rs. 81,17,303 in respect of interest income derived from overseas projects.
3.The Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in not considering deputation charges of Rs. 2,26,328 as business income and in reducing 90 per cent. thereof while computing profits of the business for the purpose of deduction under section 80HHC.
4.The learned Commissioner of Income-tax (Appeals) erred in ignoring the appellant's revised claim for deduction under section 80HHC at Rs. 53,31,535. The learned Commissioner of Income-tax (Appeals) ought to have recognised and considered the appellant's revised computation of deduction under section 80HHC filed with the Assessing Officer vide its letter dated March 26, 2004."
2. The facts in brief are that the assessee-company, in the relevant assessment year, was engaged in the business of project export, physical export, mechanical and electrical contracts, civil construction, rendering technical services, undertaking turnkey projects and property development. The assessee had filed its return of income declaring total income at Rs. 1,10,21,179 after claiming deduction under sections 80HHB, 80HHC and 80G. The assessee had also shown book profit under section 115JB at Rs. 4,12,79,000. The Assessing Officer examined noticed that the assessee had claimed deduction under section 80HHB in respect of interest received on bank deposits aggregating to Rs. 66,30,101 and interest received on margin money aggregating to Rs. 14,87,202, both aggregating to Rs. 81,73,303.
3. He examined first the assessee's claim of the following interest incomes being income from business :
| A: | Interest income on foreign project : | Rs. |
| (a)Interest received on bank deposit | 66,30,101 | |
| (b)Interest received on margin money (deducting under section 80HHB not claimed) : | 14,87,202 | |
| B: | Interest received on deposits under section 80HHC (not claimed) | 30,49,000 |
| C: | Other interest (deduction under section 80HHC) | |
| (a)Interest on bank fixed deposits (Vision Investment Co. Ltd.) | 2,83,000 | |
| (b)Interest on bank fixed deposits | 20,08,000 | |
| (c)Interest on income-tax refunds | 10,96,000 | |
| (d)Interest on inter-corporate deposits | 3,67,000 | |
| 1,49,20,303 |
4. The Assessing Officer taking note of the fact that the interest had primarily been earned from temporary surplus funds meant for various overseas projects, which the company had temporarily parked in bank fixed deposits, treated the same as income from other sources. He also treated other interest earned by the assessee on which deduction under section 80HHC was claimed as income from other sources. Thus, the entire interest income earned by the assessee was treated as income from other sources.
5. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer's action relying on the following decisions :
(i) Murli Investment Company v. Commissioner Of Income-Tax [1987] 167 ITR 368 (Raj.).
(ii) MP State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 (MP).
(iii) Collis Line (P.) Ltd. v. CIT [1982] 135 ITR 390 (Ker.).
(iv) Traco Cable Company Ltd. v. Commissioner Of Income-Tax, Ernakulam [1969] 72 ITR 503 (Ker.).
(v) Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd. [2002] 257 ITR 60 (Mad.).
(vi) Commissioner Of Income-Tax v. Gimpex P. Ltd. [2004] 268 ITR 377 (Mad.).
(vii) CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom.).
6. Being aggrieved with the order of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before us.
7. Learned counsel for the assessee, in regard to interest on bank deposits earned with respect to foreign projects, relied on the decisions of the hon'ble Bombay High Court in the cases of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 and Commissioner Of Income-Tax v. Lok Holdings [2009] 308 ITR 356 . As regards the interest received on margin money relating to foreign project, learned counsel for the assessee relied on the decision of the hon'ble Karnataka High Court CIT v. Chinna Nachimuthu Constructions reported in [2008] 297 ITR 70 ; [2008] 170 Taxman 272 and the decision of the hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Koshika Telecom Ltd. [2006] 287 ITR 479 .
8. The learned Departmental representative submitted that admittedly surplus funds were invested in fixed deposits and, therefore, the interest income earned therefrom was income from other sources. He submitted that idle funds were required for business purposes and, therefore, there was no nexus with the business of the assessee. He referred to pages 11 to 17 of paper book, which contains separate profit and loss account in relation to four projects to demonstrate that in all the profit and loss accounts, there were surplus funds. He relied on the decision of the hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom), Commissioner Of Income-Tax v. M.F.C Industries Pvt. Ltd. [2001] 248 ITR 249 (Mad).
9. We have considered the rival submissions and perused the record of the case. First we will consider the issue regarding interest received on bank deposits relating to foreign projects amounting to Rs. 66,30,101 and Rs. 30,49,000. Before the Assessing Officer, the assessee had pointed out that investment of temporary funds in securities/assets was a prudent business decision. It was further pointed out that as per the guidelines of the Reserve Bank of India, prior approval of banker for monitoring the project was required for transfer of funds from a project having surplus funds to another project having deficit funds. This approval was given only after monitoring the over all funds flow position of the project. Therefore, if the project had actually temporary surplus funds, it cannot transfer to any other project having deficit funds. In such circumstances, the company had no option but to invest such funds in bank fixed deposits to ensure that the funds were readily available, when required. It is not disputed that these funds were meant, as and when required, only for purposes of foreign projects.
10. Now the issue which crops up for our consideration is whether in view of the decision of the hon'ble Bombay High Court in the cases of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 and Lok Holdings [2009] 308 ITR 356, the surplus fund was inextricably linked with the business of the assessee and thus, assessable as income from business or was a case of surplus funds per se being invested in fixed deposits for earning interest income. In the case of Indo Swiss Jewels Ltd. [2006] 284 ITR 389, inter-corporate deposits were made by the assessee from the surplus fund that was set apart for payment for importing machinery. It was held that the interest earned on the short-term deposits of the money kept apart for the business purposes had to be treated as income earned from business and not as income from other sources. In our opinion, the facts of the present case are akin to the facts as obtaining in the case of Indo Swiss Jewels Ltd. [2006] 284 ITR 389 . Further, in the case of Lok Holdings [2009] 308 ITR 356, the facts were that the assessee firm was engaged in construction business and received monies from the purchasers of flats which it deposited with the bank. The hon'ble Bombay High Court upheld the view of the Tribunal that the entire interest sprang from the business activity of the assessee and not out of any independent activity. This decision, in our opinion, also supports the case of the assessee. The assessee had to keep funds readily available to it for purposes of its projects and, therefore, till the funds were actually required for project activities, the assessee kept the same in fixed deposits for temporary period. It is a case of temporary surplus fund available to the assessee not immediately required for its business purposes which was kept in fixed deposits but nevertheless, the funds were meant only for assessee's construction activities and, therefore, they were inextricably linked with the assessee's activities and hence, assessable as income from business. We, therefore, hold that the interest aggregating to (Rs. 66,30,101 + Rs. 30,49,000) was assessable as business income.
11. Now we will consider the issue regarding interest received on margin money in relation to foreign project amounting to Rs. 14,87,202, learned counsel for the assessee has relied on the decision of the hon'ble Delhi High Court in the case of Koshika Telecom Ltd. [2006] 287 ITR 479. In this case, the facts were that the assessee was engaged in the business of operating cellular mobile telephone services in the states of Uttar Pradesh, Bihar, Orissa and West Bengal. The assessee was required to provide finance and performance bank guarantees to the Department of Telecommunications. In the backdrop of these facts, it was held that the deposit of margin money by the assessee was inextricably linked with the furnishing of bank guarantees by the assessee to the Department of Telecommunication for obtaining a licence.
12. In the present case also, interest has been received on margin money kept with bank for availing of credit facilities. Thus, the interest was inextricably linked to the execution of foreign project and hence, in view of the decision in the case of Koshika Telecom Ltd. [2006] 287 ITR 479 (Delhi), the interest was assessable as business income. We, accordingly, hold that interest income on margin money of Rs. 14,87,202 was assessable as business income.
13. As far as other interest amounting to Rs. 37,79,000 is concerned, the same has rightly been treated as income from other sources as it had been earned on bank fixed deposits, income tax refunds and inter-corporate deposits in connection with the assessee's business. Merely because the interest income was earned in the normal course of business, it could not lead to the conclusion that the interest income is assessable as business income unless the same is inextricably linked with the assessee's business. We, accordingly, uphold the orders of the lower authorities to this extent. Ground No. 1 is partly allowed.
14. Apropos ground No. 2, the assessee had claimed deduction under section 80HHB of Rs. 81,17,303 (being interest received on bank deposits of Rs. 66,30,101 and interest on margin money of Rs. 14,87,202), which was denied by the Assessing Officer for two reasons. Firstly because he had held that the interest was assessable as income from other sources and secondly, interest could not come within the ambit of phrase "profits and gains derived from the business". He relied on the decision of the hon'ble Supreme Court in the case of Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 .
15. We have considered the submissions of both the parties and perused the record of the case. We find that this issue is concluded by the decision of the hon'ble Supreme Court in the case of Liberty India v. Commissioner Of Income Tax [2009] 317 ITR 218. In the present case, the interest is not derived from the project but from the fixed deposits kept with the bank. Thus, admittedly the immediate source of interest is fixed deposits and not from the foreign project. Learned counsel for the assessee has pointed out that in case deduction under section 80HHB is not to be allowed then only net interest is to be excluded. We find considerable force in the alternate argument of learned counsel for the assessee and, accordingly, direct the Assessing Officer to exclude only the net interest income as we have held that interest income is assessable as business income. Ground No. 2 is partly allowed.
16. The other grounds raised in this appeal were not pressed, therefore, they are dismissed as not pressed.
17. In the result, appeal filed by the assessee is partly allowed.
18. Pronounced on 21st December, 2009.
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