w w w . L a w y e r S e r v i c e s . i n



Commissioner of Income-tax v/s Malwa Cotton Spinning Mills Ltd.


Company & Directors' Information:- THE COTTON CORPORATION OF INDIA LIMITED [Active] CIN = U51490MH1970GOI014733

Company & Directors' Information:- J. K. COTTON LIMITED [Active] CIN = U17111UP1924PLC000275

Company & Directors' Information:- MALWA COTTON SPINNING MILLS LTD [Active] CIN = L17115PB1976PLC003702

Company & Directors' Information:- P A S COTTON MILLS PRIVATE LIMITED [Active] CIN = U17111TN2005PTC058104

Company & Directors' Information:- N R U SPINNING MILLS LIMITED [Active] CIN = U17111TZ1994PLC005591

Company & Directors' Information:- V R A COTTON MILLS PRIVATE LIMITED [Active] CIN = U15311PB1997PTC020061

Company & Directors' Information:- R G SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ2004PTC011274

Company & Directors' Information:- P D COTTON PRIVATE LIMITED [Active] CIN = U52321GJ2007PTC051857

Company & Directors' Information:- C A V COTTON MILLS PRIVATE LIMITED [Active] CIN = U17115TZ1987PTC002014

Company & Directors' Information:- R. I. COTTON PRIVATE LIMITED [Active] CIN = U17120GJ2010PTC061139

Company & Directors' Information:- P K P N SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ1981PTC001034

Company & Directors' Information:- V K S M COTTON MILLS LIMITED [Active] CIN = U17111TZ1998PLC008682

Company & Directors' Information:- K A S SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TZ1990PTC002955

Company & Directors' Information:- D D COTTON PRIVATE LIMITED [Active] CIN = U17120MH1994PTC156054

Company & Directors' Information:- C P SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ1994PTC005257

Company & Directors' Information:- P K COTTON MILLS PRIVATE LIMITED [Active] CIN = U17111DL2004PTC130281

Company & Directors' Information:- N S C SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ2004PTC011093

Company & Directors' Information:- P. I. COTTON PRIVATE LIMITED [Active] CIN = U17120GJ2007PTC050747

Company & Directors' Information:- J G SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ1991PTC011033

Company & Directors' Information:- J G SPINNING MILLS PRIVATE LIMITED [Not available for efiling] CIN = U18101WB1991PTC050845

Company & Directors' Information:- B V COTTON PRIVATE LIMITED [Active] CIN = U17111GJ2004PTC044704

Company & Directors' Information:- S K COTTON PRIVATE LIMITED [Active] CIN = U17110GJ2006PTC047511

Company & Directors' Information:- S R COTTON PRIVATE LIMITED [Active] CIN = U17120KA2013PTC071881

Company & Directors' Information:- K G COTTON SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17219PB1997PTC019422

Company & Directors' Information:- S D S COTTON PVT LTD [Active] CIN = U17115PB1991PTC011007

Company & Directors' Information:- K P G COTTON MILLS PRIVATE LIMITED [Active] CIN = U17115TZ1993PTC004509

Company & Directors' Information:- D B V COTTON MILLS PRIVATE LIMITED [Active] CIN = U17115TZ1982PTC001145

Company & Directors' Information:- J. C. SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17121TG2011PTC073799

Company & Directors' Information:- R R R SPINNING MILLS INDIA PRIVATE LIMITED [Active] CIN = U17111TZ1990PTC002745

Company & Directors' Information:- P A COTTON PVT LTD [Active] CIN = U74999WB1992PTC055525

Company & Directors' Information:- D D COTTON PRIVATE LIMITED [Not available for efiling] CIN = U17115PB1994PTC014981

Company & Directors' Information:- R R SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17111TZ1980PTC000984

Company & Directors' Information:- M K G SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17115TZ1990PTC002952

Company & Directors' Information:- M S SPINNING MILLS PRIVATE LIMITED [Active] CIN = U17219PB1995PTC017064

Company & Directors' Information:- S S COTTON MILLS PRIVATE LIMITED [Active] CIN = U17115PB1997PTC019918

Company & Directors' Information:- A A K. SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TZ1995PTC005766

Company & Directors' Information:- K S COTTON PRIVATE LIMITED [Active] CIN = U17299WB2003PTC096994

Company & Directors' Information:- J R COTTON MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TN1996PTC034302

Company & Directors' Information:- G P G SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TN1987PTC014844

Company & Directors' Information:- E A P SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TZ2005PTC011782

Company & Directors' Information:- D C H COTTON MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TZ1997PTC008130

Company & Directors' Information:- B D COTTON PRIVATE LIMITED [Active] CIN = U51909GJ1978PTC003234

Company & Directors' Information:- N S K SPINNING MILLS PRIVATE LIMITED [Under Process of Striking Off] CIN = U17111TZ1994PTC004816

Company & Directors' Information:- L D COTTON MILLS PRIVATE LIMITED [Strike Off] CIN = U17291MH2014PTC256832

Company & Directors' Information:- A D COTTON MILLS PVT LTD [Active] CIN = U99999MH1970PTC014837

Company & Directors' Information:- G K COTTON PVT LTD [Active] CIN = U00309BR1982PTC001698

Company & Directors' Information:- R. A. SPINNING MILLS PVT LTD [Strike Off] CIN = U17115PB1988PTC008852

Company & Directors' Information:- J S COTTON SPINNING MILLS PRIVATE LIMITED [Amalgamated] CIN = U17111TZ1990PTC002643

Company & Directors' Information:- H K SPINNING MILLS PVT LTD [Active] CIN = U17111PB1986PTC006672

Company & Directors' Information:- R R COTTON PRIVATE LIMITED [Active] CIN = U17111DL1998PTC094459

Company & Directors' Information:- O P K SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17120DL1988PTC032165

Company & Directors' Information:- R K SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17100KA1995PTC018864

Company & Directors' Information:- C R COTTON INDIA PRIVATE LIMITED [Active] CIN = U17299DL2006PTC145903

Company & Directors' Information:- V P K COTTON MILLS PRIVATE LIMITED [Strike Off] CIN = U17111TZ2000PTC009530

Company & Directors' Information:- P. D. R. SPINNING MILLS PRIVATE LIMITED [Strike Off] CIN = U17112AP2006PTC052124

    I.T.A.No. 392 of 2007

    Decided On, 14 May 2014

    At, High Court of Punjab and Haryana

    By, THE HONOURABLE MR. JUSTICE AJAY KUMAR MITTAL & THE HONOURABLE MR. JUSTICE JASPAL SINGH

    For the Appearing Parties: -------



Judgment Text

Ajay Kumar Mittal, J.

1. This appeal has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (in short, "the Act"), against the order dated March 23, 2007, annexure A.3, passed by the Income-tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (in short, "the Tribunal"), in I. T. A. No. 1336/Chandi/2004, for the assessment year 2000-01.

On May 12, 2010, the following order was passed by this court :

"The Revenue has approached this court by filing the instant appeal under section 260A of the Income-tax Act, 1961, challenging the order dated March 23, 2007, passed in I. T. A. No. 1336/Chandi/ 2004 in respect of the assessment year 2000-01. The Revenue has claimed the following substantial questions of law :

"(i) Whether, on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in deleting of disallowance of Rs. 1,42,52,223 made on account of interest relatable to investment in capital work-in-progress ignoring Explanation 8 to section 43(1) of the Income-tax Act, 1961, which requires the interest on borrowed capital to be treated as capital expenditure ?

(ii) Whether, on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in deleting of disallowance of interest amounting to Rs. 87,80,214 made under section 36(1)(iii) ?

(iii) Whether, on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in law in directing the Assessing Officer to compute the relief under section 80HHC without reducing the deduction eligible under section 80-IA/ 80-IB disregarding the provisions of section 80-IA(9) read with section 80-IB(13) ?

(iv) Whether, on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in law in directing the Assessing Officer for not excluding a sum of Rs. 2,10,99,228 from the export turnover for computing the deduction under section 80HHC ?

(v) Whether, on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in law in directing the Assessing Officer to compute the indirect costs of the Barnala unit in proportion of the export of trading goods to the total turnover of the Barnala unit disregarding Explanation (e) to sub-section (3) of section 80HHC of the Income-tax Act, 1961 ?"

Mr. Sethi, learned counsel for the Revenue, has fairly conceded that question No. 1 stands answered against the Revenue and in favour of the assessee by the Division Bench judgment of this court in I. T. A. No. 396 of 2007, decided on July 25, 2008 (CIT v. Malwa Cotton Spinning Mills Ltd.). The aforesaid judgment is based on the view taken by the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC). Accordingly, the aforesaid question would not emerge for determination.

With regard to the second question, Mr. Sethi, has stated that the Tribunal having regard to the view in S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) has referred the matter to the Assessing Officer for fresh determination. Accordingly, since the matter is pending before the Assessing Officer and the judgment of S. A. Builders covers the case against the Revenue, therefore, the aforesaid question would also not arise for determination.

Mr. Sheti has also stated with regard to questions IV and V that both questions since stand referred to the Assessing Officer which are yet to attain finality, therefore, he has not pressed those questions. However, with regard to question No. 3, the learned counsel has stated that I. T. A. No. 371 of 2007 stands already admitted.

In view of the above, we admit the appeal with regard to question No. 3 only.

(Sd.) . . . .

M. M. Kumar,

Judge

(Sd.) . . . .

Jitendra Chauhan,

Judge"

May 12, 2010

Thereafter, a review petition was filed by the Revenue. On March 18, 2011, the following order was passed :

"1. This is an application seeking review of our order dated May 12, 2010, in respect of questions Nos. i, ii, v and iv.

2. Notice of the application has been issued.

3. Mr. Sandeep Goyal, learned counsel for the non-applicant-respondent has put in appearance on behalf of the respondent. The prayer made in the application has been opposed by filing reply to the review application.

4. After hearing learned counsel for the parties, we are of the view that there are sufficient grounds for accepting the review application in respect of questions Nos. i, ii, v and iv.

5. Mr. Dinesh Goyal, learned counsel for the review applicant, has pointed out various objections made in the order of the Tribunal, which shows to the contrary. Those paragraphs have also been cited in the review application. There is no serious dispute with regard to the aforesaid factual position.

6. In view of the above, we recall our order dated May 12, 2010, in respect of questions Nos. i, ii, v and iv. Let the matter be listed for motion hearing as per roster.

(Sd.) . . .

M. M. Kumar,

Judge

(Sd.) . . . .

Jitendra Chauhan,

Judge

March 18, 2011"

On August 3, 2011, it was noticed that since the appeal has been admitted, therefore, all the issues will be considered at the time of final hearing. Now, we take up all the questions for adjudication.

Before examining the questions, the facts necessary for adjudication of the controversy involved, as narrated in the appeal may be noticed. The respondent-a company derives income from manufacturing of various types of yarns. The return declaring loss of Rs. 19,40,69,964 for the assessment year 2000-01 was filed on October 22, 2001. While completing the assessment, apart from other disallowances, the Assessing Officer also made certain additions/disallowances and framed the assessment under section 143(3) of the Act on March 31, 2003, annexure A.1 at an income of Rs. 2,32,77,971. The details of additions/disallowances relevant for adjudication of the present appeal are as under :

(i) Disallowance of Rs. 1,42,52,223 on account of interest on investment in capital work-in-progress.

(ii) Deduction under section 80HHC was computed on 'profits of business' after reducing the deduction allowable under section 80-IB of the Act.

(iii) Rs. 2,13,86,870 being export sale proceeds not received in India within the period of six months were reduced from the export turnover for the year for calculating deduction under section 80HHC.

(iv) In terms of the provisions of section 80HHC(iii), the respondent while computing indirect cost considered the indirect costs of Bar-nala unit in proportion of the export of trading goods to total turn over of the unit. The Assessing Officer, however, considered the indirect costs of the entire business of the assessee for the said purpose." Aggrieved by the order, the respondent preferred appeal before the Commissioner of Income-tax (Appeals) II, Ludhiana (CIT(A)). Vide order dated August 25, 2004, annexure A.2, the Commissioner of Income-tax (Appeals) partly allowed the appeal. Not satisfied with the order, the respondent filed appeal before the Tribunal. Vide order dated March 23, 2007, annexure A.3, the Tribunal partly allowed the appeal. Hence the present appeal by the Revenue.

We have heard learned counsel for the parties and perused the records.

Re : Question (i)

The issue herein relates to whether the interest paid which was relatable to investment in capital work-in-progress was to be allowed or not. The apex court in Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) had held that the provisions of Explanation 8 to section 43(1) of the Act has no relevance in respect of section 36(1)(iii) of the Act. It has also been held that the proviso to section 36(1)(iii) of the Act inserted by the Finance Act, 2003, with effect from April 1, 2004, is only prospective and would not apply to the earlier assessment years. In view of the aforesaid judgment, the Tribunal has rightly decided the issue in favour of the assessee and against the Revenue. Question No. (i) is, thus, answered against the Revenue and in favour of the assessee. Re : Question (ii)

Adverting to question No. (ii), the controversy herein relates to whether interest-free loan given by the assessee to its sister concern was admissible as deduction under section 36(1)(iii) of the Act. The Tribunal had recorded the following finding :

"The plea of the assessee before the Assessing Officer was that no disallowance is called for since the assessee is recovering interest from its sister concern at the same rate, which it has paid on the borrowings. It is submitted that the interest at 15.5 per cent. is charged from the sister concern, on this aspect there is no dispute. Simultaneously, the assessee canvassed that the average cost of borrowings to the assessee for the year was 15.5 per cent. and, therefore, there did not remain any difference between the amount charged from the sister concern and the amount incurred by way of expenditure. The Assessing Officer has considered the rate of 18.5 per cent. as interest paid by the assessee on its borrowings. It is evident from the reply of the assessee that the basis for the Assessing Officer to adopt the rate of 18.5 per cent. is devoid of any factual support. The reply of the assessee was available to the Assessing Officer yet the Assessing Officer in paragraph 5 of the order observes that the interest paid by the assessee to the banks and financial institutions is 18.5 per cent. We are unable to appreciate and neither is there any discussion by the Assessing Officer in this regard as to the basis of such a finding of the Assessing Officer. The said approach of the Assessing Officer to say the least, is arbitrary and unjustified. On the contrary, the stand of the assessee is also supported by the banker's certificate averring thereof that the cash credit limits of the assessee carried interest at 13.26 per cent. The said evidence has been rejected by the Commissioner of Income-tax (Appeals) for the reason that the assessee failed to justify the reasons for its non-production before the Assessing Officer. The approach of the Commissioner of Income-tax (Appeals) is unjustified and unreasonable. There is nothing on record to indicate that subsequent to the submission of the assessee to the Assessing Officer made, vide communication dated March 24, 2003, the Assessing Officer confronted the assessee on this aspect. Therefore, there was no occasion for the assessee to submit the impugned evidence that the cost of funds was much below 18.5 per cent. assured by the Assessing Officer. Therefore, in our view, the aforesaid evidence ought to have been considered by the Commissioner of Income-tax (Appeals).

19. In terms of the facts and material available on record, it is abundantly clear that the plea of the Assessing Officer that the assessee has incurred the expenditure on funds utilised for advancing loan to sister concerns higher than the amount of interest received from sister concern is not tenable. Therefore, the invoking of section 36(1)(iii) in the instant case, although justified in principle would not result in any disallowance in the hands of the assessee. This is for the reason that the assessee has charged interest on loans to sister concern not below the interest paid on the funds utilized for the said purpose."

A perusal of the aforesaid shows that the Tribunal had come to the conclusion on the basis of the material on record that the assessee had charged interest on loans to its sister concern not below the interest paid on the funds utilized for the said purpose as the plea of the assessee was that it had been charging interest at the rate of 15.5 per cent. from its sister concern and the average cost of borrowings to the assessee was also 15.5 per cent. It was in these circumstances that the Tribunal deleted the addition made by the Assessing Officer by invoking section 36(1)(iii) of the Act. We do not find any justification to take a different view from the one taken by the Tribunal in the facts and circumstances of the case. This question is, thus, also answered against the Revenue.

Re : Question (iii)

This question relates to whether deduction under section 80HHC of the Act is to be restricted in view of section 80-IB(13) read with section 80-IA(9) of the Act.

It was not disputed between the parties that the issue stands concluded in favour of the Revenue by the order dated April 21, 2011, passed by this court in I. T. A. No. 371 of 2007 (CIT v. Davinder Exports) wherein it was held as under :

"Learned counsel for the appellant fairly states that the matter is covered against the assessee by order of this court dated April 18, 2011, in I. T. A. No. 469 of 2010 Asin Exim International v. CIT, wherein it was held that if deduction under section 80-IA has been taken, deduction under section 80HHC was not admissible in view of section 80-IB(13) read with section 80-IA(9) of the Act, following earlier judgment of this court in Friends Casting (P.) Ltd. v. CIT [2011] 50 DTR 61 ; [2012] 340 ITR 305 (P&H)."

The question is, thus, answered accordingly.

Re : Question (iv)

Adverting to question No. (iv), the issue herein relates to whether the outstanding amount of export sale proceeds which remained pending had to be disallowed for purposes of calculation of benefit under section 80HHC of the Act. The Tribunal had concluded as under :

"We have carefully considered the rival stand on this issue. The relevant provision in question is clause (a) to sub-section (2) of section 80HHC of the Act, which we reproduce hereinafter :

'(2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee other than the supporting manufacturer in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation.-For the purpose of this clause, the expression 'competent authority' means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealing in foreign exchange.'

Sub-section (2)(a) prescribes that the sale proceeds of goods for merchandise exported out of India should be received or brought into India by the assessee within a period of six months from the end of the previous year or within such further period as the competent may allow in this behalf. It is further provided that the competent authority means the Reserve Bank of India or any such other authority as is authorised for regulating payments and dealings in foreign exchange. Evidently the assessee had outstanding export invoices even beyond six months from the end of the previous year in question. Such unrealised exports invoices were, therefore, liable to be excluded from the export turnover for the purposes of computing relief under section 80HHC of the Act. So, however, the plea of the assessee is that it has realised certain portion within the period extended by the competent authority. The necessary certificate in this regard issued by the Bank is placed at page 143 of the paper book. In terms of the said certificate, out of the total outstanding export invoices of Rs. 2,13,86,870 the assessee realized a sum of Rs. 2,10,99,228 within the extended period. In view of the aforesaid in our view on facts it is evident that the competent authority has allowed the assessee to realise the outstanding export invoices. Therefore, in our view, there is no justification for excluding a sum of Rs. 2,10,99,228 from the export turnover for computing the deduction under section 80HHC of the Act. In the result we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to recompute the deduction under section 80HHC accordingly. In the result on this ground the assessee partly succeeds."

From the perusal of the aforesaid, it comes out that the Tribunal had remanded the issue to the Assess

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ing Officer for recomputing the amount which remained unrealised on account of export invoices even during the extended period from the export turnover for computing the deduction under section 80HHC of the Act. Thus, no error could be found in the decision of the Tribunal. Re : Question (v) Taking up the last question, the matter herein relates to whether the assessee was entitled to claim proportionate indirect expenses only in respect of the unit which was carrying on export activity whereas the assessee was carrying business in two units, i.e., Barnala I and Barnala II. The Tribunal while adjudicating the issue had relied upon decision of the Special Bench of the Tribunal at Mumbai in the case of Surendra Engg. Corporation v. Asst. CIT [2004] 268 ITR (AT) 118 (Mumbai) [SB] ; [2003] 86 ITD 121 (Mum) [SB]. Learned counsel for the Revenue had produced a communication received from the Commissioner of Income-tax III, Ludhiana, dated December 31, 2012, wherein it was intimated to him that the appeal against the aforesaid decision relied upon had been dismissed by the Bombay High Court. The said communication is taken on record as mark "A". The Tribunal had only remanded the matter to the Assessing Officer to decide the issue in the light of the aforesaid judgment. Learned counsel for the Revenue did not make any meaningful argument to assail the findings of the Tribunal in this regard or to show that the decision of the Special Bench of the Tribunal in Surendra Engg. Corporation's case (supra) as affirmed by the Bombay High Court has been reversed. Accordingly, we do not find any infirmity in remitting the matter to the Assessing Officer for recomputation in the light of the decision of the Special Bench of the Tribunal at Mumbai. The appeal is disposed of in the manner indicated above.
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