ORDER
N.S. Saini, A.M.
1. This appeal is filed by the Revenue against the order of the CIT(A) directing the AO not to deduct the amount of capital subsidy from the cost of the assets while calculating depreciation allowance and against the direction of the CIT(A) to the AO to recalculate deduction under Section 80HH and Section 80-I of the IT Act, 1961, by treating the income from interest as business income. The third ground of appeal is general in nature inviting no comments.
2. We have received a telegram from the respondent for adjournment of hearing which after due consideration was rejected because the case being very old one.
3. In the case of CIT v. Multiplan India (P) Ltd. (1991) 38 ITD 320 (Del), the
Tribunal, Delhi Bench, has observed that :
“When the appeal is presented the same is accepted. Thereafter the concerned
clerk in registry verifies whether accompanying documents are received or not and if not a memo is issued calling for the papers which are also required to be attached to appeal memo. But at no stage usually the scrutiny is made on points whether the appeal memo and contents really conform to various Tribunal Rules or as it a legally valid appeal under Section 253 of the Act. These points, if arising, can be considered only at a time of hearing and that is why the rule prescribes that mere issue of notice does not mean the appeal is admitted. This, according to us, is the significance of Rule 19(2)”.
4. In this appeal filed by the Revenue the defect is that the memorandum of appeal is not accompanied with two copies of grounds of appeal the first appellate authority and two copies of statement of facts, if any, filed before the said first appellate authority in violation of Rule 9(1) of the ITAT Rules, 1963, which is mandatory. In the similar facts and circumstances, in ITA No. 316 (Gau) of 1993 in the case of Dy. CIT Dibrugarh v. The Lohit Co-operative General Stores Ltd. we dismiss the appeal of the Revenue for not filing the documents mandatorily required under Rule 9(1) of the ITAT Rules, 1963.
5. Following the above decision, this appeal is liable to be dismissed as unadmitted for not filing two copies of grounds of appeal before the first appellate authority and two copies of statement of facts, if any, filed before the said appellate authority.
6. Even otherwise on merits of the case also no interference with the order of the CIT(A) is called for. The facts of the case in brief are that the AO reduced the amount of capital subsidy of Rs. 47,728 from the written down value of the fixed assets thereby reducing the amount of depreciation allowable. The AO treated the interest income of Rs. 71,613 earned by the assessee as income from other sources and thereby did not treat the same as profit derived from the industrial undertaking and consequently did not allow deduction in respect of the same under Section 80HH and Section 80-I of the Act.
7. The CIT(A) in his order relying on the judgment of the Hon’ble Gauhati High Court in the case of CIT v. Meghalaya Plywood Ltd (1993) 202 ITR 343 (Gau) directed the AO not to deduct the amount of subsidy from the cost of the assets for the purpose of calculation of depreciation allowances.
8. We find that this issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of CIT v. P.J. Chemicals Ltd. (1994) 218 ITR 830 (SC). In favour of the assessee. Hence, no interference is called for with the order of the CIT(A).
9. The CIT(A) has observed that the assessee had paid interest of Rs. 1,39,707 to bank and other parties on loan taken for the purpose of business and also received a sum of Rs. 72,613 as interest earned on funds temporarily not required for business and, therefore, the interest earned partake the character of business income. The CIT(A) on the above facts found that despite earning interest of Rs. 71,613, the said earning has merely gone to reduce the net interest burden of the assessee from Rs. 1,39,707 to Rs. 68,094. Thus, in effect there was no income on account of interest included in the profits of the business He also found that his view was supported by the decision of the Delhi High Court in the case of Snam Progatti S.P.A. v. CIT (1981) 132 ITR 70
(Del) wherein it was held that the interest so received was part of business income and deduction under Section 80HH and Section 80-I in respect of the same is allowable.
10. The learned Departmental Representative argued in favour of the AO.
11. We would like to site the decision of the Bombay High Court in the case of CIT v. Chanda Diesels (1995) 216ITR 639 (Bom) that Section 80HH is intended to encourage setting up of new industrial enterprises and hence will have to be construed liberally in a broad commercial sense keeping its object in view. The Hon’ble Madras Bench of the Tribunal in the case of Pondicherry Distilleries Ltd. v. ITO (1984) 8 ITD 39 (Mad) has held that “Section 80HH” speaks of deduction in respect of any profits and gains derived from newly established industrial undertaking. The terra ‘undertaking’ has not been defined in the Act and has to be given the normal meaning. It envisages not only the activity of manufacture or production of goods or articles but the entire set up including all paraphernalia, the various assets and liabilities i.e. the entire set up with which the business of manufacture or production of goods is carried on. Even if the interest income cannot be strictly referable to the business activity of manufacture of goods dealt by the assessee, it can still be regarded as profit or gains derived from the undertaking as a whole”. The Hon’ble Madras High Court has also held in the case of CIT v. South India Shipping Corporation Ltd. (1995) 216 ITR 651 (Mad) held :
“We are of considered view that on sum of Rs. 3,32,845 representing interest from London brokers, other interest and miscellaneous receipts of the assessee-company should be treated as income derived from the activity of shipping business.”
Accordingly, the income derived by way of interest from the London brokers of the assessee-company are entitled to the benefit under Section 80J of the Act. The Ahmedabad Bench of the Tribunal in the case of Asstt.’ CIT v. Khambhata Family Trust (1998) 62 TTJ (Ahd) 685 : (1998) 67 ITD 411 (And) has held that interest income earned on investment necessitated by compelling business retirements would be treated as part of business income for the purpose of deduction under Section 80HH and Section 80-I of the Act. Further the Bombay High Court in the case of CIT v. United Carbon India Ltd. (1991) 190 ITR 622 (Bom) has held that interest on short-term deposit made out of moneys not immediately required for assessee’s business constitutes part of profit derived from the industrial undertaking and is eligible for deduction under Section 80-I of the Act. Further the Bombay Bench of the Tribunal in the case of Pink Star v. Dy. CIT (2000) 66 TTJ (Mumbai) 885 : (2000) 72 ITD 137 (Mumbai) at 142, 151 after considering the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) and CIT v. Bokaro Steel Ltd. (1999) 102 Taxman 94 (SC) opined that from the above decision of the apex Court it follows that whereas revenue receipt cannot be adjusted against capital expenditure, a capital receipt can be so adjusted. On the same analogy the Tribunal opined that while computing profits of business for the purpose of Section 80HHC, the revenue receipts can be adjusted against revenue expenditure of the like nature and held that the revenue receipt in the form of interest went to
reduce the revenue expenditure of interest. This very principle has been followed by the said Tribunal while dealing with the issue of labour charges also To the same effect is the decision of the Tribunal, Delhi Bench, in the case of Rajasthan Synthetics Ltd. v. Dy. CIT (1997) 60 ITD 682 (Del) wherein it was held that where the assessee received a sum from a party on account of technical service charges which represented recovery of expenditure and really reduced the expenditure of the assessee’s claim for deduction under Section 80HH and Section 80-I in respect of such receipts was to be allowed. Keeping the above decision in mind and as in the instant case no material has been brought on record is contrary to the findings of the CIT(A). we are of the considered view that interest received went to reduce the interest expenditure of the industrial undertaking and thus, there was no positive interest income left with the assessee whose taxability as non-business income would be considered. Hence, interference with the order of the CIT(A) is not called for.
12. In the result, the appeal filed by the Revenue is dismissed.
N.R.S. Ganesan, J.M.
1. I have the benefit of going through the draft order prepated by my learned brother, the A.M. I fully agree with the reasoning and conclusion’ arrived by my learned brother in respect of ground No. 1 of the appeal. However, I am not able to convince myself to agree with the reasoning and conclusion arrived by learned A.M. in respect of ground No. 2. Hence I am passing a separate and dissenting order.
2. The second ground of appeal is in respect of deduction under Section 80HH and Section 80-I of the IT Act, 1961, by treating the income from interest as business income. The undisputed facts of the case is that the assessee has received Rs. 71,615 as interest on account of surplus advance by the company to other parties. The case of the assessee is that the surplus fund was advanced in order to earn interest income for the purpose of reducing the interest burden of the assessee. Now we have to see whether the surplus fund advanced for the purpose of earning interest income is to be treated as business income or income from other sources. As already stated the deposit was made for the purpose of earning interest. The case of the assessee is that they made the deposit in order to reduce the interest burden of the assessee. The very question came for consideration before the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad). The Hon’ble Madras High Court after discussing the various case laws including the judgment of the apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) held that the income earned by way of interest by deposit of surplus funds has to be treated as income from other sources and not income from business. The Hon’ble Madras High Court further held that all the decisions of various High Courts which have hold the interest received on short-term bank deposit by an assessee carrying on business and having the business income are not to be treated as income from other sources, but as business income must be held to have been impliedly overruled by the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). Now we have to see whether the earning of income by making a
deposit of surplus fund for the purpose of reducing the interest burden of the assessee will have any consideration to treat the interest income as income from business This issue was also discussed by the Hon’ble Madras High Court in the very same case and held that ‘interest paid on every-draft obtained for the purpose of business could not be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to be taxed under the head “Income from other sources”. In view of the above, it is very clear that the interest earned by the assessee by way of deposit of surplus fund cannot be deducted from interest payable by the assessee to their creditors. This point was also clarified by the Hon’ble Madras High Court by saying “though the assessee may not be entitled to have interest paid by it on the overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income”. So, the matter is very clear that the interest paid by the assessee to their creditors has to be deducted from its income from business as business expenditure and it cannot be deducted from the interest earned on deposit of surplus fund. In view of the above fact, the interest earned by the assessee cannot be treated as business income and it has necessarily be treated as income from other sources. Merely because the interest received by the assessee went to reduce the interest expenditure of the industrial undertaking it will not change the character and source of income.
3. Now we have to see whether the assessee is entitled for deduction under Section 80HH and Section 80-I The Hon’ble Madras High Court had an occasion to deal with Section 80HH in the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad). The Hon’ble Madras High Court after considering the various judgments of High Courts and Supreme Court held that in view of the word “derived from” used in Section 80HH the income must be derived from industrial undertaking and it is not sufficient for the assessee to show that the income is of business income. In view of the judgment of the Hon’ble Madras High Court the present interest income earned by the assessee cannot be treated as income derived from industrial undertaking. A similar view was also taken by the jurisdictional High Court in the case North East Gases (P) Ltd v. CIT (1996) 200 ITR 372 (Gau). Furthermore, as already discussed, this interest income is income from other sources. Hence, I am of the considered opinion that the assessee is not entitled for deduction under Section 80HH and 80-I of the IT Act, 1961.
4. Regarding the defect no doubt this Bench of the Tribunal in the case of Dy. CIT Dibrugarh v. The Lohit Co-operative Central Stores Ltd. in ITA No. 316 (Gau) of 1993 held that Rule 9(1) of the ITAT Rules, 1963, in mandatory, I am also one of the Member constituting the above Bench. I have passed a separate and concurrent order in that case. In that case I have held that Rule 9(1) is mandatory in view of the peculiar argument advanced by the learned Departmental Representative that no grounds of appeal was served upon them and the appeal before this Bench is only a first appeal as far as the Department is concerned. In these circumstances this Tribunal held that Rule 9(1) is mandatory. It is well settled principles of law that the reasons stated in a particular order or judgment has to be taken in view of the particular facts and circumstances prevailing in that particular case. Moreover, I have also said that it is necessary
to know the subject-matter of the appeal in that case and the defect memo was also issued by the Registry of the Bench to the Department in that case. In this case no defect memo was issued pointing out the defect at any particular point of time. No opportunity was given to the Department to rectify the defect, if any, notified by the Registry of this Bench. Furthermore, there is no dispute regarding the subject-matter of appeal before the first appellate authority. Under these circumstances, the filing of grounds of appeal before the lower authorities and the statement of facts is just a formality and it cannot stand in the way of doing justice on merit by this Bench of the Tribunal. As already pointed out, admittedly no defect memo was issued in this case to the Department to rectify the defect. In other words, no opportunity was given to the Department pointing out any defect to rectify the same. Under these circumstances this cannot be a ground to reject this appeal.
5. In view of the above facts, the appeal is partly allowed as indicated above.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961
September, 2001
In this appeal there is difference of opinion between the Members on ground No. 2 of the appeal. In view thereof, the issue is referred to the Hon’ble President of the Tribunal under Section 255(4) of the IT Act, 1961, for opinion of the Third Member on this issue. The issue framed is as under:
“(1) Whether the assessee is entitled for deduction under Section 80HH and Section 80-I of the IT Act, 1961, from the interest income of surplus fund merely because it goes to reduce the interest burden of the industrial undertaking ?
(2) Whether the filing of two copies of grounds of appeals and statement of facts before the first appellate authority is mandatory when the defect was not pointed out to the appellant and no dispute regarding the subject-matter of appeal before the first appellate authority ?”
V. Dongzathang, President
1. The following points of difference were referred to roe under Section 255(4) of the IT Act, 1961 :
“1. Whether the assessee is entitled for deduction under Section 80HH and Section 80-I of the IT Act, 1961, from the interest income of surplus fund merely because it goes to reduce the interest burden of the industrial undertaking ?
2. Whether the filing of two copies of grounds of appeal and statement of facts before the first appellate authority is mandatory when the defect was not pointed out to the appellant and no dispute regarding the subject-matter of appeal before the first appellate authority ?”
2. Insofar as the first point is concerned, the facts are that the Revenue filed the appeal to the Tribunal in Form No. 36 on 3rd Oct., 1994. The appeal memo was sent to the respondent on 4th Oct., 1994, and the case was fixed for hearing on 22nd June, 2001. Since the Bench did not function on 22nd June, 2001, the case was adjourned to 20th July, 2001, which was again adjourned to 14th Aug., 2001. The assessee sent a telegram requesting adjournment which was rejected and the appeal was disposed of ex parte.
3. The original order was written by the learned A.M. According to him the
case of the assesses is covered by the decision of the Tribunal in the case of CIT v. Multiplan India (P) Ltd. (1991) 38 ITD 320 (Del). In the memorandum of appeal filed by the Revenue the copies of grounds of appeal before the first appellate authority and two copies of statement of facts as required under Rule 9(1) of the ITAT Rules, 1963 were not included. Since the Tribunal under similar circumstances dismissed the appeal of the Revenue in the case of Dy. CIT v. The Lohit Co-op. General Stores Ltd. in ITA No. 316/Gau/ of 1993, it was his view that the appeal should be dismissed.
4. On the other hand the learned J.M. found that in the particular case the defect memo was not issued to the appellant and no opportunity was given to rectify the defect. It was further found by him that there was no dispute regarding the subject-matter of appeal before the first appellate authority. Under the circumstances, the grounds of appeal before the lower authorities and the statement of facts are just a formality and it cannot stand in the way of doing justice on merit by the Bench of the Tribunal. He accordingly held that the appeal cannot be rejected and dismissed on this ground. He also distinguished the case of Dy. CIT v. The Lohit Coop. General Stores Ltd. (supra).
5. Since there is difference of opinion on this issue, a reference was made to me “as indicated above. At the hearing, Shri B.B. Deb, learned Departmental Representative appeared for the Revenue- However, there is no compliance on the part of the assessee. The case was accordingly decided ex parte and on merit after hearing the learned Departmental Representative Shri B.B. Deb. From the orders of the learned Members, it is seen that the Department filed the memorandum of appeal without including therein the grounds of appeal before the first appellate authority and two copies of statement of facts. It is also an admitted fact that the Tribunal did not issue defect memo to the appellant. It is also not disputed that the grounds of appeal before the first appellate authority were not in dispute and the assessee never raised this issue before the Tribunal at the time of hearing. In such a case, it may not be proper on the part of the Tribunal to dismiss the appeal in limine after issuing notice of hearing and after fixing the appeal in limine after issuing notice of hearing and after fixing the appeal for hearing and after hearing the appellant, without giving notice for rectifying the defect. Admittedly the provisions of the rule are mandatory but the manner in which the requirements of the Rules are to be complied with is in the realm of procedure and such procedure cannot take away the substantive right of appeal conferred upon the parties by the statute as held in the case of CCT v. Stanand Giri (1975) Tax LR 203 (Pat). To the extent such rule attempts to curtail or restrict the right of appeal, such rule is held to be ultra vires in the case of Joseph v. Tahsildar (1978)112 ITR 410 (Ker).
6. It is also seen that though Rule 9(1) of the Income-tax Appellate Tribunal Rules, 1963, is mandatory Sub-rule (3) of Rule 9 provides that the Tribunal may in its discretion accept the memorandum of appeal which is not accompanied by all or any of the documents referred to in Sub-rule (1). When the Department filed the appeal, the Tribunal did not issue defect memo. In such a case, the appeal is deemed to have been accepted and it has to be further presumed that the
Tribunal has already exercised its discretion under Sub-rule (3) of Rule 9 in favour of the appellant. It will, therefore, be unjustified if the appeal is dismissed after hearing the parties especially when this issue was not raised by the respondent. Having decided the issue on merit, the question of validity of appeal is fait accompli. I hold accordingly and uphold the order of the learned J.M on the point.
7. With regard to the next point, it is seen that the assessee claimed deduction under Section 80HH and 80-I of the IT Act and the AO, however, held that the interest earned by the assessee is in the nature of income from other sources and, therefore, deduction under Section 80HH and 80-I of the Act is not allowable on the interest income.
8. Aggrieved by the said disallowance, the assessee took up the matter in appeal before the CIT(A) and claimed that it paid an interest of Rs. 1,39,707 as interest to bank and other parties on loans taken for the purpose of business. It had also received a sum of Rs. 71,613 as interest on account of surplus advance by the company to other parties. Such advances were claimed to have been given only to reduce the interest burden and interest so received was only part of the business activity and, therefore, should be considered as business income for the purpose of deduction under Section 80HH and 80-I. The learned CIT(A) accepted the claim and directed the AO to treat the interest income as income from business and allowed deduction under Section 80HH and 80-I.
9. The Revenue, therefore, came up in appeal before the Tribunal. The learned A.M. after detailed discussion given by him held that the interest received by the assessee went to reduce the interest expenditure of the industrial undertaking and thus, there was no positive interest income left with the assessee whose taxability as non-business income could be considered. He, therefore, held that the learned CIT(A) was justified in allowing the claim of the assessee.
10. On the other hand, the learned J.M. was of the view that merely because the interest received by the assessee went to reduce the interest expenditure of the industrial undertaking will not change the character and source of the income and, therefore, such income cannot be treated as business income. In coming to this decision, he relied on the decision of the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad) and the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC). It was further held by the learned J.M. that in view of the decision of the Hon’ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad) and other various judgments of the High Courts and the Supreme Court, the word “derived from” used in Section 80HH must be derived from industrial undertaking and it is not sufficient for the assessee to show that the income is of business income, Reliance also was placed on the decision of the jurisdictional High Court in the case of North East Gases (P) Ltd. v. CIT (1996) 220 ITR 372 (Gau). He, therefore, held that the interest income is income from other sources and, therefore, the assessee is not entitled for deduction under Sections 80HH and 80-I of the IT Act.
11. On this difference of opinion, the second point was referred to me for my decision. At the time of hearing it was submitted by the learned Departmental Representative that the issue is squarely covered by the decision of the Hon’ble jurisdictional High Court in the case of North East Gases (P) Ltd. v. CIT (supra). In such a case, there is no alternative for the Tribunal but to follow the binding decision of the jurisdictional High Court. It is, therefore, submitted that the interest income cannot be treated as business income for the purpose of deduction under Sections 80HH and 80-I of the Act.
12. On careful consideration of the submissions in the light of the material on record and on the basis of the various decisions referred to above, I am of the opinion that the view taken by the learned J.M. is in order and is to be upheld. The jurisdictional High Court in the case of North East Gases Pvt. Ltd. v. CIT (supra) held that for the purpose of Section 80HH of the IT Act, 1961, there must be a direct nexus between the activity and the earning of the profit or gain. The income, profit or gain cannot be said to have been “derived” from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner. Accordingly, the interest income did not come within the scope of “profits and gains of business” but under the heading of “Income from other sources”. Therefore, any income earned from fixed deposits and the interest thereon could not be said to be profits and gains derived from an industrial undertaking.
13. Since the judgment of the jurisdictional High Court is binding on the Tribunal, there is no alternative but to follow the said judgment. I hold accordingly and uphold the view taken by the learned J.M.
14. The matter will now go before the regular Bench for decision according to majority opinion.
BY THE BENCH:
In the instant case, in view of the majority decision (the learned Judicial
Member and the Third Member) the appeal of the Department is partly allowed.