Narayan Industries Vs ACIT (ITAT Delhi)
Held that interest earned out of the fixed deposit made from the surplus funds being not connected to the manufacturing activity and do not form an integral part of the profits derived from industrial unit is not eligible for deduction
Facts-
The appellant is a partnership firm engaged in the business of manufacturing and export of home furnishings items like quilts, bedspreads, cushion covers, etc. The appellant during the assessment proceedings claimed deduction under section 80IC for the interest income earned from fixed deposit pledged to avail overdraft facility.
The appellant received interest of Rs. 6,58,683/- and incurred bank interest and commission charges of Rs. 33,14,931/- which included interest on overdraft facility. The appellant argued that interest expenditure on overdraft facility availed exceeded interest income on fixed deposit pledged to avail such facility. There was, thus, no interest income effectively earned by the appellant and therefore, interest income was not required to be excluded for computing profit eligible for deduction under section 80-IC of the Act.
Further, the assessee also claimed deduction u/s 80-IC sale consideration received on sale of Focus scrip/ licence.
Conclusion-
We hold that interest earned out of the fixed deposit made from the surplus funds being not connected to the manufacturing activity and do not form an integral part of the profits derived from industrial unit is not eligible for deduction. Interest is an unearned passive income derived out of non manufacturing activity.
We hold that Focus Products Incentive in the nature of capital receipt not liable to tax under the provisions of the Income Tax Act, 1961.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the Assessee against the order of the ld. CIT(A)-37, New Delhi dated 28.07.2017.
2. The Assessee has raised the following additional grounds of appeal:-
“Re: Request for admission of additional grounds of appeal – Section 253 of the Income Tax Act, 1961 read with Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963
The applicant craves leave to raise the following by way of additional grounds of appeal:
“1.2. That on the facts and circumstances of the case and in law, consideration received from sale of Focus License under the Focus Product Scheme (FPS) erroneously offered to tax, ‘being in the nature of a Capital receipt not liable to tax, should be directed to be excluded from the taxable income of the appellant. “
The brief facts giving rise to the above additional ground of appeal is as under:
In order to promote the exports, development of certain industries, employment generation, etc., the Government under the Foreign Trade Policy, provides subsidies and incentives to industries on the basis of different parameters set out in the respective schemes declared. The purpose of subsidy/ incentive schemes varies from development of backward areas to development of a lagging industry or to provide support to existing industries in difficult times of their operations, Whenever a scheme is declared, the purpose of the subsidy/incentive is set out in clear terms in rhc scheme itself.
The Government of India in its Foreign Trade Policy 2004 started Special Focus Initiatives with an object to continuously increase out percentage share of global trade and expanding employment opportunities especially in rural and semi-urban areas. Under the mother policy of Special Focus Initiative certain special focus initiatives for market diversification, technological up gradations, support to status holders were Identified for which specific schemes like Focus Market Scheme (FMS), Focus Product Scheme (FPS). Technological Upgradation Fund Scheme (TUF5), Status Holders Incentive Scheme (SHIS) were started.
In Foreign Trade Policy 2006, under the Special Focus Initiative, Focus Product Scheme (FPS) was introduced with an objective to incentivize export of such products which have high employment intensity in rural .and semi-urban areas, so as to offset the inherent infrastructure inefficiencies and other associated costs involved in marketing of these products. The scheme was launched in 2006 and subsequently, several amendments were made to the scheme by adding more products eligible for export incentives under the scheme and giving different rate of duty credit scrip concessions.
As per the policy, in order to achieve the underlying objective of the FPS, Duty Credit Scrip at prescribed percentage of FOB value of exports is issued to the exporter. Duty credit scrip is a license to import commodities in a duty free manner for the scrip value. The face value of scrip so issued is intended to offset/ reimburse various costs involved in manufacturing/ marketing of the products exported outside India. The exporter en-cashes such scrip by selling the same in the market, which is either sold at profit or at discount vis-a-vis the face value of the scrip.
The applicant, during the year under consideration, as per the regulations of the abovementioned (FPS) scheme received scrips/ license having face value of Rs.2,00,65,667 which were sold for a consideration amounting to Rs, 1,91,78,974 which was duly credited to the profit and loss account. The appellant under misconception of law, offered the incentive for taxation.
in this regard, it is submitted that the taxation of incentive/ subsidy by whatever name called, is determined by the purpose for which the same is granted and not the form / mode / manner in which the incentive is received/ disbursed. The law in this regard fairly well settled and reference may be- made to the following decisions:
