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TMI Blog2008 (8) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... , Section 80IB required that they should be derived from any business of the industrial undertaking. No contrary judgement of any other Court on the scope of the expression profits of the business of the undertaking as contrasted with the expression profits derived by/from the industrial undertaking was brought to our notice. The facts of the case undisputedly show that it is only for the purpose of making imports that the assessee had to open LCs with the banks and that it was only to comply with the direction of the banks that the assessee was compelled to make fixed deposits with them as margin monies. It is not in dispute that the proceeds of the fixed deposits came out of the export sale proceeds and not out of any surplus monies available with the assessee. Therefore, not only is there an inextricable link between the margin monies and the business of the undertaking, but there is also a link between the interest arising from the margin monies and the assessee's business. Thus, the receipt of interest on margin monies arises out of business transactions and, therefore, has to be considered as profits of the business of the undertaking. If it is found, as we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arguments before us, the ld counsel for the assessee did state that all the sales of bullion were for cash. It is generally known that in the bullion market transactions are put through only in cash and if really Virgo Polymers had an insight into the functioning of the bullion market, it would not have accepted such a term as one of its functions. Be that as it may, absolutely no evidence has been led to prove that Virgo Polymers did carry out any of the eight functions assigned to them. It may be that the assessee had filed some papers before the Income-tax authorities and it may even be that the commission payment was made by cheque. But the Income-tax authorities are not bound by the mere existence of the documents to hold that the payment was made wholly and exclusively for the purpose of the assessee's business. Assessee and Virgo Polymers are not related to each other in any manner is not of any consequence. The fact that this was the only year in which any commission was paid is also of no relevance. Merely because of these facts the AO cannot be compelled to allow the commission as deduction in the absence of any evidence to show the rendering of any service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from the export of articles or things and that the assessee did not satisfy this condition, in as much as the immediate or direct source of the interest was not the export oriented undertaking (EOU), but it was the fixed deposits made with the banks. He referred to the judgment of the Supreme Court in the case of Pandian Chemicals Ltd., v. CIT (262 ITR 278), the judgment of the Madras High Court in CIT v. Menon Impex (P) Ltd., (259 ITR 403) as well as the order of the Bangalore 'A' Bench of the Tribunal in the case of Synopsis (India) Pvt. Ltd., and held, applying these rulings to the facts of the present case that the activity of the export oriented undertaking of the assessee came to a halt the moment the jewellery/bullion is exported and any interest earned on the fixed deposits made out of the export proceeds does not partake the character of income derived by the EOU from the export of articles or things and that the genesis of the interest lies in the fixed deposits. According to the assessing officer the offering of fixed deposit as margin is only incidental and at best a ploy to avoid taxation of export proceeds . He further observed that offering of margin moni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court in Kabadi Enterprises v. ITO (2007) 290 ITR 610 in which it was held that the earning of interest on temporary deposit was not linked to the export activity for the purpose of section 80HHC. As regards the judgement of the Hon'ble Karnataka High Court in Producin P.Ltd., (supra), relied on by the assessee, the Commissioner of Income-tax (Appeals) held that the decision was delivered in the context of Sec.80HHC and, therefore, cannot be applied to the assessee's case because of the contextual dissimilarity between the two. He also relied on the judgement of the Madras High Court in CIT v. Menon Impex (supra) which was relied on by the Assessing Officer. In this view of the matter, he upheld the action of the Assessing Officer and decided the issue against the assessee. 6. The assessee is in further appeal before the Tribunal challenging the decision of the Departmental authorities in the first four grounds taken before us. Besides reiterating the submissions advanced before the departmental authorities, the learned counsel for the assessee strongly relied on sub-section (4) of Section 10B as it stands after the substitution made by the Finance Act, 2001 w.e.f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osits given as margin monies for procuring LCs from the banks for the purpose of import can be considered as the profits of the business of the undertaking, the learned counsel for the assessee submitted that in view of the close and inextricable nexus between the export activity and the earning of the interest, the departmental authorities were not right or justified in bringing the interest to tax under the head Income from other sources . He submitted that it was the business of the undertaking to export the jewellery and it has to necessarily import gold from outside India and it was only for the purpose of effectuating the import of gold and to secure to the supplier outside India the price of the gold that the assessee had to open LCs with the banks. When the banks as a matter of practice insist on the assessee making fixed deposits as margin monies, it cannot be said that the assessee was voluntarily making those deposits so that they can be treated as the investments of the assessee. It was common ground that the deposits came out of the export proceeds and they were utilised as margin monies which earned interest. Since there was close connection between the margin monies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee. The sub-section was substituted by the Finance Act, 2001 as follows w.e.f. 1.4.2001: (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. A perusal of the sub-section (4), both before and after the substitution would show a few changes. Before the substitution, the sub-section referred to the profits of the business and to the total turnover of the business carried on by the assessee . The profits derived from export of articles or things shall be the amount which bears to the profits of the business, the same proportion as the export turnover of such articles or things bears to the total turnover of the business carried on by the assessee. After the subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains of business or profession, capital gains and income from other sources. Section 56(1) says that income of every kind which is not to be excluded from the total income under the Act shall be charged to tax under the head income from other sources but adds a caveat that it would be so chargeable only if it is not chargeable to tax under any of the other heads namely, salaries, income from house property, profits and gains of business or profession or capital gains. Section 56(1) therefore enables even interest income to be assessed under the head profits and gains of business but only if the interest is not assessable to tax under any of the other heads namely salaries, property, business or capital gains. The Assessing Officer in the present case would appear to have proceeded to examine only the question whether the interest on fixed deposits can be said to be profits derived by the undertaking from the export of articles or things under sub-section (1). He seems to have overlooked that he should have also proceeded to sub-section (4) of Section 10B to find out whether the interest can be considered as profits of the business of the undertaking . If we divert our attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words (in the section) that makes all the difference in the interpretation of the Section. It was observed as under: We are of the view that the decision in Ritesh Industries (2005) 274 ITR 324 (Delhi) is distinguishable since it concerns section 80-I of the Act which again uses the expression profits and gains derived from an industrial undertaking . It is crucial to appreciate the difference in language in section 80HH, section 80-I and section 80-IB of the Act While the language used in section 80HH of the Act and in section 80-I of the Act is similar, there is a clear departure in the language used in section 80-IB of the Act and it is this choice of words that makes all the difference that we are concerned with. We are of the opinion that it is not necessary for us to go as far as the Gujarat High Court has done in coming to the conclusion that duty drawback is profit or gain derived from an industrial undertaking. It is sufficient if we stick to the language used in section 80-IB of the Act and come to the conclusion that duty drawback is profit or gain derived from the business of an industrial undertaking. The language used in section 80-IB of the Act is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prises (supra) itself is authority for the position that the question whether a particular item of receipt (of income) is connected to the export activity or the business undertaking is one of fact to be decided on an appraisal of the facts of each case. In this view of the matter, we are of the humble opinion that Kabadi Enterprises (supra) cannot be relied upon by the department to contend that in all cases where interest is received by the assessee it will not be entitled to the deduction. We may also note that in Civil Appeal No. 1332 of 2006 in CIT, Karnataka-I v M/s. Producin Pvt. Ltd. (and connected appeals) by order dated 5th December 2007 the Supreme Court has set aside the judgment of the Hon'ble Karnataka High Court in Producin Pvt. Ltd (supra) and remitted the matter to the Tribunal to decide the question as to whether the receipt (of interest) fell under sec.28 or under sec.56 of the Act, that is, whether the interest was assessable as business income or as income from other sources. A copy of the order was filed before us in the course of the hearing. In the present case, we have, for reasons already stated, held that the interest fell to be assessed as profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this juncture, it is necessary to notice an observation made by the Commissioner of Income-tax (Appeals) in paragraph 3.5 of his order. He has observed that since the fixed deposits with the banks were retained beyond the realization of the related export proceeds, it is suggestive of an intention on the part of the assessee to earn profits on such deposits which are assessable only as income from other sources. Normally speaking, any interest earned on fixed deposits made as investments should be assessed as income from other sources because such interest would not fall to be assessed under any other head of income. However, in the present case, the fixed deposits have not been made out of the surplus monies available with the assessee which the assessee was intending to invest for interest. The fixed deposits were made as margin monies for the purpose of obtaining LCs which was a business compulsion. It was not a voluntary act of the assessee. Once the fixed deposits are made as margin monies, what happens is that they are made subject to the business risks. In the case of a pure investment, it is not made to such risks. The investment remains isolated from the business risks, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fixed deposits were made with the banks as margin monies they were made as part of the business operations of the undertaking, subject to all the risks of the business, and the character of the deposits cannot change merely because they were retained by the bank beyond the realization of the export proceeds. 12. We now proceed to continue to consider the question as to why sub-section (4) of Section 10B should control the interpretation of sub-section (1). It is no doubt true that sub-section (1) mandates that the profits and gains should be derived by the undertaking from the export of articles or things. We have also noticed earlier that the provisions of sub-section (1) have been made subject to the other provisions of the Section which includes sub-section (4). This is one reason why the language employed in sub-section (4), which is wider in scope than the language employed in sub-section (1) should control the interpretation of the latter. One more reason as to why this should be so may now be noticed. Though sub-section (1) uses the word derived , it is sub-section (4) which actually prescribes what is meant by profits derived from export of articles or things . T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below Section 80HHC was introduced to statutorily prescribe a formula as to what would represent profits of the business for the purpose of claiming deduction u/s.80HHC. The function of sub-section (4) of Section 10B is exactly the same. In the light of the statutory formula prescribed by this Section, the same has to be applied to the interpretation of sub-section (1). 13. In the light of the foregoing discussion, we are of the humble opinion that the departmental authorities were not right in treating the interest of ₹ 32,89,72,927/- as income from other sources . In our opinion, the interest falls to be assessed as profits of the business of the undertaking. If that is so, the interest becomes eligible for the deduction u/s.10B. We, accordingly, direct the Assessing Officer to allow the deduction and modify the assessment. Thus, ground numbers 1 to 4 are allowed. 14. Ground nos.5 and 6 are directed against the disallowance of the commission payment of ₹ 2 Crores made to M/s. Virgo Polymers (India) Ltd., It was the assessee's claim before the Assessing Officer that the commission was paid under a debit note dated. 20.11.2003 issued by the aforesaid compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed with respect to the dealings between M/s. Virgo Polymers (India) Ltd., and the customers or M/s. Rajesh Exports and the customers. f. No details have been furnished with respect to the expertise possessed by M/s. Virgo Polymers (India) Ltd, in the field of jewellery business. g. None of the customers figuring in the list of customers furnished by M/s. Virgo Polymers (India) Ltd, figure in the list of sundry debtors furnished by M/s. Rajesh Exports Ltd., h. M/s. Rajesh Exports Ltd, itself being one of the largest exporters and manufacturers having an established business and goodwill in Bangalore requiring the services of a person from Chennai for the purpose of introduction seems highly unlikely. i. In the communication with M/s. Virgo Polymers (India) Ltd, dated 06.05.03 para 5 reads that the commission at 0.40% on the total business subject to a maximum commission of ₹ 2 Crores shall be paid to M/s. Virgo Polymers (India) Ltd., has secured a total business of ₹ 500 Crores or more. The list submitted by M/s. Virgo Polymers (India) Ltd, has 40 customers which means that each customer on an average has purchased 12.5 Crore worth of bullion. This s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 2,43,53,320/- was payable to Virgo Polymers (pages 57 to 67 of the paper book). It was submitted before us that the entire sales were for cash and since as per the terms of the agreement the maximum commission payable was restricted to ₹ 2 Crores, only that amount was paid though the commission payable at the agreed rate of 0.40% of the sales of ₹ 608.83 Crores would come to ₹ 2,43,53,320/-. When it was pointed out to the learned counsel for the assessee that the paper book did not contain any evidence to show the nature and type of services rendered by Virgo Polymers to the assessee, he took time to establish the same. On the next date of hearing, he filed an application under Rule 29 of the Appellate Tribunal Rules, 1963 seeking permission to adduce additional evidence to justify the payment of the commission. The following evidence was sought to be adduced before us: 1. The certificate dt.1.8.2008 issued by Virgo Polymers stating that the commission was received for assisting and carrying on the assessee's gold bullion business at Bangalore by identifying the potential customers, selling the bullion to them, tallying their accounts at the end of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant at Bangalore. 2) Placing orders with the importer and fixing the gold price with the importer, as per the anticipated sale price and sale quantity. 3) Taking charge of the stock and maintaining the stock upon tallying the same every day. 4) Locating the customers for the gold bullion and fixing the price and the quantity with them. 5) Making the sale bill and delivering the goods against cash/cheque or DD. Major receipts were by cash which required the counting of cash. 6) Tallying the cash balance and gold balance and submitting the consolidated entries to the Accounts Officer of Rajesh Exports. 7) Negotiating with the banks for acceptance of huge cash generated and depositing the cash in the bank along with the security provided by Rajesh Exports. 8) Achieving a sale of over ₹ 500 crores and thereby submitted the entire proceeds of the sale and the tallied accounts of the transactions. It was further explained that initially the assessee was issuing manual bills but when the sales were taken over by the staff of Virgo Polymers, they started issuing computerized bills. It was through the expertise of Virgo Polymers that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the earliest point of time without waiting to be prompted by the court or tribunal. The adducing of additional evidence before the Tribunal under Rule 29 is not a matter of right but is conditioned by several requirements. No doubt, one of the requirements is that the additional evidence should be required for any substantial cause which is quite a broad expression; however broad the expression is, it is necessary for the party who seeks to introduce the additional evidence to demonstrate the existence of substantial cause. A mere failure on the part of the person seeking to invoke Rule 29 to place all the material facts relating to the claim before the departmental authorities cannot justify the invoking of the powers of the Tribunal to admit the additional evidence for substantial cause. In the present case, the assessee has sought to place before us the nature of the activities carried on by Virgo Polymers in effecting the sales of gold bullion in the Indian market. It has been stated that the staff of Virgo Polymers were using the office of the assessee and the assessee's name and the team of Virgo Polymers was headed by one Nagabhushan. The fact that Nagabhushan was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its claim. These certificates are self-serving documents and do not add anything to the credibility of the evidence or to the evidentiary value. For these reasons, we are unable to hold that any substantial cause would be served by admitting the additional evidence. We, accordingly, reject the assessee's application under Rule 29 of the Tribunal Rules and decline to admit the additional evidence. 18. We now proceed to consider the evidence adduced by the assessee before the income-tax authorities in support of the claim of the deduction of the commission payment. We find that the letter dt.6.5.2003 written by the assessee to Virgo Polymers contains the terms and conditions of the commission payment and that the letter has been accepted by Virgo Polymers which has also signed the same in token of having accepted the terms. But the mere existence of the document in writing containing the terms and conditions does not ipso facto lead to the conclusion that the payment of commission is an allowable deduction. The assessee is a company carrying on business as manufacturers and exporters of fine gold jewellery in Bangalore. Virgo Polymers is a company which is not engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debit note on 20.11.2003 for ₹ 2 Crores as their commission (page 53 of the paper book). According to the details filed by the assessee in pages 57 to 67 of its original paper book, a total sales of ₹ 608.83 Crores were made through Virgo Polymers between 1.4.2003 and 31.3.2004 on which commission at the rate of 0.40 % amounted to ₹ 2,43,53,320/-. The commission was restricted to ₹ 2 Crores as per the terms of the letter dt.6.5.2003. It is quite unusual that a debit note for the maximum commission of ₹ 2 Crores was raised even in November, 2003. One more unusual feature is that though the maximum sales are between April, 2003 and November, 2003, Virgo Polymers chose to wait till almost the end of November, 2003 to raise the debit note. From the details filed in the original paper book the sales up to 11.11.2003 amounted to ₹ 603.64 Crores. It is difficult to believe that Virgo Polymers would have waited till almost the end of November, 2003 to raise the debit note for the commission due to it in respect of the sales allegedly made through its efforts since April 2003. Each sale, according to the details was quite substantial and it would be agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. It may be that the assessee had filed some papers before the Income-tax authorities and it may even be that the commission payment was made by cheque. But the Income-tax authorities are not bound by the mere existence of the documents to hold that the payment was made wholly and exclusively for the purpose of the assessee's business. In Lachminarayan Madanlal v. CIT, West Bengal (1972) 86 ITR 439, the Supreme Court held as follows: The question whether an amount claimed as an expenditure was laid out or expended wholly and exclusively for the purpose of the business has to be decided on the facts and in the light of the circumstances in each case. The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might by such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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