As per section 80 IC it is the net interest to be excluded from the eligible profit for calculation of deduction

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH “B” New Delhi)

BEFORE SHRI G.D. AGRAWAL, HON’BLE VICE-PRESIDENT

AND SHRI RAJPAL YADAV: HON’BLE JUDICIAL MEMBER

ITA No.4072/Del/2011

Assessment Year: 2006-07

Flex Foods Ltd.,

305, 3rd Floor, Bhanot Corner,

Pamposh Enclave, Gr. Kailash-I,

New Delhi

(PAN: AAACF0108K)

(Appellant)

Vs.

Deputy CIT,

Central Circle 18,

New Delhi.

 (Respondent)

ITA No.4882/Del/2011

Assessment Year: 2006-07

Assistant CIT,

Central Circle 18,

New Delhi.

(Appellant)

Vs.

Flex Foods Ltd.,

305, 3rd Floor, Bhanot Corner,

Pamposh Enclave,Gr.Kailash-I,

New Delhi

(PAN: AAACF0108K)

 (Respondent)

Assessee by: Shri Suresh Ananthram, CA

Department by: Shri S Krishna, CIT(DR)

ORDER

PER RAJPAL YADAV: JUDICIAL MEMBER

The assessee and revenue are in cross-appeal before us against the order of Learned CIT(Appeals) dated 05.08.2011 passed for assessment year 2006-07. The grounds of appeal taken by the assessee are not in consonance with Rules 8 of the ITAT's Rules, they are descriptive and argumentative in nature. In brief, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of deduction under sec. 80-IC of the Income-tax Act, 1961 on an amount of Rs.48,41,738 which is an interest income earned by the assessee. The revenue in its appeal has pleaded that the Learned CIT(Appeals) has erred in deleting a sum of Rs.50,000 from alleged total interest income on the ground that administrative expenses paid for earning gross interest income should be allowed as a deduction to the assessee and thereafter net interest income has to be disallowed from the eligible profit for computing deduction under sec. 80-IC of the Act.

2. Since both the grounds taken by the respective parties are interconnected to each other, therefore, we proceed to dispose of both the appeals together.

3. The brief facts of the case are that search and seizure operation under section 132 of the Income-tax Act, 1961 was conducted on 10.5.2007 in M/s. U. Flex Ltd., Group of cases. The assessee was also covered under the search operation. In order to give logical end to the search proceedings, a notice under sec. 153A of the Act was issued upon the assessee on 9.5.2008. In response to the notice, it was contended by the assessee that the return filed originally be treated as filed in response to this notice. Learned Assessing Officer has observed that assessee company is primarily engaged in growing and processing of mushroom, culinary herbs and other fruits and

vegetables. It has declared turnover of Rs.23.81 crores. It has shown business income of Rs.2.95 crores and claimed deduction under sec. 80-IC of the Act. While analyzing the assessee’s claim for deduction under sec. 80- IC, learned Assessing Officer found that it contained interest income of Rs.48,41,738 which does not qualify for grant of deduction under sec. 80-IC. Learned Assessing Officer excluded this amount from the eligible profit for the purpose of computation of deduction. He made following discussion:

“4.1 During the assessment proceedings, it was found the assessee has earned interest income from bank for Rs.10,16,125 and interest from other amounting to Rs.38,25,613 aggregating to Rs.48,41,738. Deduction u/s. 80-IC is not allowable on this income as such income cannot be said to be derived from the business of the undertaking or enterprises. At the most, such income can be said to be attributable to the business of the undertaking or enterprise. Reliance is also placed upon the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT 262 ITR 278 (Supreme Court) where it was held that interest earned by industrial undertaking on deposit with electricity board does not qualify for earlier u/s. 80-HH as it is not derived from the industrial undertaking. Accordingly, the claim for deduction u/s. 80-IC on this amount of Rs.48,41,738 is disallowed and added back to the total income declared”.

4. On appeal, Learned CIT(Appeals), in principle, concur with the Assessing Officer, but observed that assessee must have incurred a sum of Rs.50,000 for earning gross interest income which should be excluded while computing the net interest income for exclusion from the eligible profit for the purpose of computation of deduction admissible under sec. 80-IC. Accordingly, Learned CIT(Appeals) has excluded Rs.50,000 out of the gross interest income for computing eligible profit for deduction under section 80- IC.

5. The learned counsel for the assessee conceded to the extent that Hon'ble Delhi High Court in the case CIT vs. Sri Ram Honda Power Equip reported in 289 ITR 475 has held that interest income is to be assessed as income from other sources, meaning thereby, it will not qualify for deduction under sec. 80-IC. However, learned counsel for the assessee submitted that the Hon’ble Court has observed that only net interest income is to be excluded from the eligible profit. For buttressing his contentions, he further relied upon the judgment of Hon'ble Karnataka High Court rendered in the case of CIT vs. M/s. Buhler India Ltd. passed in ITA No.123 of 2006. This decision has been delivered on 14th September 2011. The learned counsel for the assessee has placed on record copy of this decision. The question which is relevant for the purpose of the present appeals is as follows:

“1. Whether the appellate authorities were correct in holding that for the purpose of computation deduction under section 80IC of the Act interest income earned by the assessee after deducting interest payments on borrowed funds should be taken into account despite the fact that only profits and gains from an industrial undertaking which manufactures articles was only allowable as per the said section?”

6. He pointed out that the Hon'ble High Court after putting reliance upon the judgment of the Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip (supra) as well as upon the decision of CIT Vs. Gokuldas Exports rendered by the Hon'ble Karnataka High Court in ITA

No.25/23 has decided this issue in favour of the assessee and observed that only net interest expenses is to be excluded.

7. Learned DR on the other hand relied upon the order of the Assessing Officer and submitted that assessee failed to give any flow chart indicating the availability of the funds for earning interest income. It is for the assessee to submit the details of interest expenses and how those expenses had the direct nexus with earning of interest income. In the absence of such details, learned Assessing Officer has rightly excluded the gross interest income from the computation of deduction admissible under sec. 80- IC of the Act.

8. We have heard the rival contentions and gone through the record carefully. The assessee has not advanced any arguments with regard to the proposition that on interest income deduction under sec. 80-IC is admissible, therefore, there is no idea to examine the provisions of sec. 80-IC and in what condition the computation for such deduction has to be made. According to the judgment of Hon'ble Delhi High Court in the case of CIT vs. Sri Ram Honda, interest income has to be assessed as a income from other sources. In paragraph 26 of the judgment, Hon’ble Court has observed that interest income on fixed deposit for the purpose of availing of credit facility from the bank does not have an immediate nexus with the export business and, therefore, it has to necessarily be treated as income from other sources and not business income. In brief, the issue squarely covered by the decision of Hon’ble jurisdictional High Court. The only issue left for adjudication is quantification of interest income for the purpose of exclusion from the eligible profit for grant of deduction under sec. 80-IC. According to this decision, it is the net interest income which has to be excluded. The details are not on the record. Learned first appellate authority on an ad hoc basis allocated 50,000 rupees towards administrative expenses for earning interest income. This allocation is also impugned by the revenue in its appeal. Faced with this difficulty, we deem it appropriate to remit the issue to the file of the Assessing Officer for a limited purposes. The assessee shall submit exact details demonstrating the expenses who have direct nexus with earning of interest income. Learned Assessing Officer shall determine such expenses and thereafter worked out the exact amount of interest income which is to be excluded from the computation required to be made for the purpose of section 80-IC of the Act. In view of the above discussion, both the appeals are allowed for statistical purposes.

Decision pronounced in the open court on 22.06.2012

                                                        Sd/-                 Sd/-

                                       (G.D. AGRAWAL)   (RAJPAL YADAV)

                                        VICE-PRESIDENT  JUDICIAL MEMBER

Dated: 22/06/2012

Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT(Appeals)

5) DR:ITAT

ASSISTANT REGISTRAR