ORDER
B.L. Khatri, A.M.
1. This appeal has been filed by the assessee against the order of the CIT(A)-XXIII, New Delhi, for the asst. yr. 1999-2000.
2. Ground No. 1 is regarding validity of action taken under Section 147/148 of the IT Act. Brief facts of the case are that the original return of income was filed on 13th Dec. 1999. The same was processed under Section 143(l)(a) of the IT Act in a summary manner on 30th Nov., 2000 at the returned income of Rs. 1,33,732. Subsequently, on the basis of audit objection (paper book 38, 39), the AO came to know that the appellant was not entitled to deduction under Section 80-IA on interest on Vikas cash certificate as the interest income earned on margin money deposited with bank had no direct nexus with the assessee and the same cannot be considered as interest received by the assessee from the industrial undertaking.
3. Learned Authorised Representative has challenged the validity of initiation of proceedings under Section 147 and subsequently issued notice under Section 148 of the IT Act on the following grounds:
4. Firstly, the reassessment proceedings initiated on the basis of audit objection were invalid. In support of this contention, he relied upon the following case law:
1. Indian & Eastern Newspaper Society v. CIT ;
2. Brig. B. Lall v. WTO ;
3. Anil Starch Products Ltd. v. ITO ;
5. Secondly, he contended that in this case, the original return was filed on 31st Dec, 1999 and the same was processed on 30th Nov., 2000 under Section 80-IA of the IT Act. Notice under Section 143(2) could have been served as a period of twelve months from the end of the month in which the return was furnished had not expired. Therefore, the AO had no power to issue notice under Section 148 and the notice issued under Section 148 of the IT Act was not valid. In support of his contention, he relied upon the case of Vipin Khanna v. CIT and Ors. (2002) 175 CTR (P&H) 335 : (2002) 255 ITR 229 (P&H).
6. Thirdly, he submitted that there was change of opinion on the part of the AO and thus, the notice issued under Section 148 of the IT Act was invalid.
7. Learned Departmental Representative rebutted the contention of the learned Authorised Representative by relying on the case of New Light Trading Co. v. CIT and also on the case of N. Sandeep Reddy v. Asstt. CIT (2005) 96 TTJ (Hyd) 315 : (2005) 95 ITD 33 (Hyd).
8. Learned Authorised Representative submitted that the case of Indian & Eastern Newspaper v. CIT (supra) related to the preamendment period of Section 147 of the IT Act whereas in the cases referred to above relied upon by the learned Departmental Representative, it was held that cases can be reopened on the basis of audit objection.
9. As regards the contention of the learned Authorised Representative that when the time for issue of notice under Section 143(2) was available, the AO was not justified in issuing notice under Section 148. Learned Departmental Representative had also relied upon the case of Vipin Khanna v. CIT (supra) which was relied upon by the learned Authorised Representative and invited our attention to p. 230 of the judgment wherein it was held that it was absolutely clear that petitioner had claimed depreciation in the return @ 50 per cent and he had nowhere disputed the fact that the admissible rate of depreciation to him was 40 per cent. This fact alone was sufficient for the ITO to initiate proceedings under Section 148 of the IT Act.
10. As regards the change of opinion, learned Departmental Representative submitted that the return was processed under Section 143(l)(a) of the IT Act in a summary manner, therefore, the AO had not applied his mind to the facts of the case and there was no question of change of opinion.
11. We have heard the rival submissions and perused the material available on record. We find that in this case, the return was processed under Section 143(l)(a) of the IT Act and no order under Section 143(3) of the IT Act had been passed. Therefore, the AO has not applied his mind to the facts of the case. Learned Departmental Representative had rightly relied upon the case of N. Sandeep Reddy (supra) wherein after relying on the case of CIT v. P.V.S. Beedies (P) Ltd. , it was held that assessment can be reopened on the basis of audit objection. It was held by the Hon’ble apex Court in the case of CIT v. P.V.S. Beedies (supra) that reopening of the case on the basis of factual error pointed out by the internal audit party is permissible under law. In the case before us, we find that the AO had reopened the assessment on the basis of factual information given by the audit party. This view has also been upheld by the jurisdictional High Court in the case of New Light Trading Co. v. CIT (supra)/
12. As regards the issue of notice under Section 148, without issuing notice under Section 143(2) when the stipulated time for issue of notice had not expired, we find that this issue was decided by the Tribunal, Hyderabad Bench, in the case of N. Sandeep Reddy (supra) wherein in para 28 of the order, it was held that it is well-settled that non-issue of notice within a stipulated time under Section 143(2) was not a bar on the AO for reopening the case under Section 148. Similar was the decision in the case of Vipin Khanna v. CIT (supra) wherein it was held that the AO can exercise his power under Section 147 of the Act.
13. As regards the contention of the learned Authorised Representative that there was change of opinion, in this connection, it is relevant to refer to the case of CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB), wherein it was held that an order can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of Sub-section (3) of Section 143, a presumption can be raised that such an order had been passed on application of mind. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceedings without anything further. Therefore, we do not agree with the contention of the learned Authorised Representative that there was change of opinion on the part of AO.
14. After examining the facts of the case and relevant case law on the subject, we hold that proceedings under Section 147 of the IT Act had validly been initiated and the notice under Section 148 of the IT Act was valid. Thus, we find no infirmity in the order of the CIT(A) and the same is sustained.
15. Ground Nos. 3 to 9 are regarding upholding of disallowance of claim of deductions under Section 80-IA of the IT Act to the extent of Rs. 21,54,144 by treating the income from interest as “income from other sources” instead of “business income”.
16. Ground No. 5 is regarding netting of interest income as an alternative plea.
17. Brief facts of the case are that during the year under consideration, the appellant had received interest from Vikas cash certificate deposits, which was claimed as part of business income. The appellant had made following submissions before the AO:
As regards the interest income of the assessee firm in respect of Vikas cash certificate deposited with the bank as margin money, it is submitted that the main item required in the manufacture of industrial generators is engine, which is purchased from M/s Cummins India Ltd., Pune. To avail the bank facility, like opening of LCs in favour of M/s Cummins India Ltd., Pune, and issue bank guarantee in favour of its customers, the assessee firm has to deposit margin money with its bankers. For allowing such facilities, the deposit of margin money is the basic requirement of the bank. This is also supported by the certificate dt. 8th Oct., 2003 issued by the Syndicate Bank which says that these Vikas cash certificate deposits are taken as margin money for LCs/Hundies facility granted to the assessee firm. The requirement of margin money and Vikas cash certificates is the basic condition for opening of LCs/bank guarantee as per rules and regulations of the bank. A copy of bank certificate dt. 8th Oct., 2003 has already been filed.
18. The AO held that interest on deposits with bank for opening letter of credit and other formalities was income from other sources and was not eligible for benefit under Section 80HHC and assessed the interest earned from Vikas cash certificates as income from other sources. After taking into consideration the contentions of the appellant, the learned CIT(A) held as under:
4.1 I have considered the facts of the case and submission of the appellant and the case law relied upon. The appellant has admitted that in order to avail bank facility like opening of LCs the assessee firm was required to deposit margin money with banks and Vikas cash certificate deposits were taken as margin money. As mentioned above, the AO has relied on the decision in the case of K. Ravindernathan Nair v. Dy. CIT to conclude that interest income on fixed deposit would be assessed as income from other sources. In this context it would be relevant to refer to the observations of the Hon’ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh (1948) 16 ITR 325 (SC) in which it was held that interest on receipts from rent arrears from agricultural land would not be agricultural income but would be assessable under the head ‘Income from other sources’. It would also mean that the source of funds would not determine the nature of the income from the investment made out of such funds. The decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT also relevant in this context. In the cases of CIT v. Jose Thomas and Nanji Topanbhai & Co. v. Asstt. CIT , it was held by the Hon’ble Kerala High Court that even when FDRs are taken as security for obtaining loans, the interest on such FDRs is not income from business but is income from other sources. As mentioned by the AO in the case of K. Ravindranathan Nair v. Dy. CIT (supra), the Hon’ble High Court while following its earlier decisions in the abovementioned cases (supra) and (supra)] has held that interest derived by the assessee from bank deposits for opening letters of credit, etc. to enable the assessee to export goods was not eligible for deduction under Section 80HHC. The Hon’ble Supreme Court has dismissed the SLP filed by the assessee in the abovementioned case. The above decisions in principle apply to the case of the appellant also. Therefore, in view of the various judicial pronouncements the action of the AO in assessing the interest income from Vikas cash certificate deposit as income from other sources was justified and is accordingly upheld.
So far as the appellant’s claim for netting of interest is concerned, the benefit cannot be given once the interest income is assessed under the head income from other sources. Only that expenditure which has been directly incurred to earn the interest income can be set off against such income. In the instant case, no evidence regarding any such expenses which were incurred to earn the interest income received has been shown by the appellant. Reference may be made to the decision of the Hon’ble Supreme Court in the case of CIT v. Dr. V.P. Gopinathan , wherein it was held that the interest received by the assessee on the FDRs was income and could be reduced only if there was a provision in law permitting such diminution. Therefore, considering the facts and circumstances of the case, the submission of the appellant in respect of netting of interest is rejected.
19. Learned Authorised Representative relied upon the case of CIT v. Nagpur Engineering Co. Ltd. . He submitted that the interest income is eligible profits of the business while computing the deduction under Sections 80HHC and 80-I of the IT Act.
20. Learned Departmental Representative relied upon the case of National Thermal Power Corpn. Ltd. v. Addl. CIT (2004) 91 TTJ (Del) 75 : (2004) 91 ITD 101 (Del) and contended that in view of this order of the Tribunal, deduction under Sections 80-I and 80-IA was not eligible on miscellaneous receipts like interest from banks on deposits, etc. In this case, the interest income was earned on Vikas cash certificate kept with bank and margin money. It is to be seen whether the interest income earned by the appellant on Vikas cash certificate was business income derived from the industrial undertaking or it was an income from other sources. Section 80-IA allows deduction on professional gains derived from any business of an industrial undertaking. This issue is covered by the following case law:
(i) Hindustan Lever Ltd. v. CIT ;
(ii) Consolidated Photo & Finvest Ltd. v. Asstt. CIT ;
(iii) Pandian Chemicals Ltd. v. CIT (2003) 183 CTR (SC) 99 : (2006) 262 ITR 278 (SC).
21. In the case of CIT v. Sterling Foods , the Hon’ble apex Court has looked into the meaning of the word “derive”. In this case, it was held that the word ‘derive’ is usually followed by the word ‘from’ and it means : “get, to trace from a source, arise from, originate in, show the origin of formation of”. There must be, for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking.
22. In the case of Hindustan Lever Ltd. v. CIT (supra), again the meaning of word “derived” was considered wherein they had referred to the decision of the Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh & Ors. (1948) .16 ITR 325 (PC).
23. In the end, in this case it was held at p. 302 of the judgment as under:
That the word ‘derived’ is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered.
24. In the case of Pandian Chemicals (supra), the meaning of words “derived from” was again considered. After relying upon the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , where it was held that the expression “derived from” had a narrower connotation than the expression “attributable to”. After having considered the meaning of the words “derived from” as per the various decisions of the Hon’ble apex Court, we hold that the interest earned on Vikas cash certificate cannot be considered as profits and gains of business derived from industrial undertaking. Thus, we find no infirmity in the order of the CIT(A). The same is sustained for the reasons given therein. Lastly, as regards ground No. 5, i.e. netting of interest income, the learned Authorised Representative has not argued on this issue. However, we are of the opinion that the benefit of netting cannot be allowed in this case. For this purpose we have relied on the following case law:
(i) Keshavji Ravji & Co. Etc. v. CIT ;
(ii) CIT v. V. Chinnapandi .
25. The Hon’ble apex Court has held in the case of Keshavji Ravji & Co. (supra) that one of the relevant tests would be to see whether the funds on which interest is paid or received partake of the same character. In this case, interest paid and received do not partake of the same character. Therefore, no benefit of netting of interest is allowed.
26. In the result, the appeal of the assessee is dismissed.