ORDER Pradeep Parikh, A.M.
These cross-appeals are directed against the order of the learned Commissioner (Appeals) dated 14-10-1996, for assessment year 1992-93. As the appeals relate to the same assessment year, we find it convenient to dispose of both of them together by this combined order. The appeal of the department is taken up first.
1. ITA No. 73741Mum/1996 (departmental Appeal)
2. Following ground is raised in the appeal :
"On the facts and in the circumstances of the case, Commissioner (Appeals) has erred in allowing the expenditure out of interest earned by the assessee. ',
3. Assessee-firm is in the business of import and export of cut and polished diamonds. For the year under consideration, it returned a total income of Rs. 285 which was assessed to Rs. 3,50,440 under section 143(3) of the Income Tax Act, 1961 (the Act). During the year, assessee had paid total interest of Rs. 28,89,618 on borrowed funds and had received Rs. 3,50,158 as interest on moneys advanced. While computing business profits for the purpose of deduction under section 80MC, assessee had included the said sum of Rs. 3,50,158 in it. assessing officer, however, observed that interest was earned in India from Indian sources and that the amount was not brought in convertible foreign exchange. Interest income, therefore, according to the assessing officer did not qualify for deduction under section 80MC. Accordingly, it was excluded from business income and was taxed under the head "income from other sources."
3. Assessee-firm is in the business of import and export of cut and polished diamonds. For the year under consideration, it returned a total income of Rs. 285 which was assessed to Rs. 3,50,440 under section 143(3) of the Income Tax Act, 1961 (the Act). During the year, assessee had paid total interest of Rs. 28,89,618 on borrowed funds and had received Rs. 3,50,158 as interest on moneys advanced. While computing business profits for the purpose of deduction under section 80MC, assessee had included the said sum of Rs. 3,50,158 in it. assessing officer, however, observed that interest was earned in India from Indian sources and that the amount was not brought in convertible foreign exchange. Interest income, therefore, according to the assessing officer did not qualify for deduction under section 80MC. Accordingly, it was excluded from business income and was taxed under the head "income from other sources."
4. Before the Commissioner (Appeals), it was contended that interest receipt should not be considered in isolation but as part of business transactions wherein interest had been paid to the tune of Rs. 28,89,618. In the alternative, it was contended that if interest received was to be treated as income from other sources, then interest paid on borrowed funds should be allowed as deduction for arriving at the net interesi income. In this connection, assessee also demonstrated as to how certain advances had a direct nexus with specific borrowings.
4. Before the Commissioner (Appeals), it was contended that interest receipt should not be considered in isolation but as part of business transactions wherein interest had been paid to the tune of Rs. 28,89,618. In the alternative, it was contended that if interest received was to be treated as income from other sources, then interest paid on borrowed funds should be allowed as deduction for arriving at the net interesi income. In this connection, assessee also demonstrated as to how certain advances had a direct nexus with specific borrowings.
5. So far as the first contention was concerned, Commissioner (Appeals) held that it could not be said that the borrowings and advances were incidental to the export business of the astessee. Hence, claim for deduction under section 80HHC on Rs. 3,50,158 stood denied. With regard to the alternate contention, Commissioner (Appeals) observed that although assessee had furnished a chart wherein co-relation between borrowings and advances was sought to be proved, in the absence of separate cash flow statement regarding all the loan transactions, it was not possible to rule out that assessee's own capital may have been utilised for making the advances either partly or wholly for earning interest. Considering the fact that to some extent assessee had shown specific correlation between the borrowings and advances, he held that on an estimate basis, 50 per cent of the interest earned can be allowed as interest expenditure. Thus, where the assessee had sought for entire exclusion of interest income even under the head other sources (interest expenditure being more), net interest income of Rs. 1,75,079 came to be taxed under the head other sources. It is against this 50 per cent allowance, the department is aggrieved and is in appeal before us.
5. So far as the first contention was concerned, Commissioner (Appeals) held that it could not be said that the borrowings and advances were incidental to the export business of the astessee. Hence, claim for deduction under section 80HHC on Rs. 3,50,158 stood denied. With regard to the alternate contention, Commissioner (Appeals) observed that although assessee had furnished a chart wherein co-relation between borrowings and advances was sought to be proved, in the absence of separate cash flow statement regarding all the loan transactions, it was not possible to rule out that assessee's own capital may have been utilised for making the advances either partly or wholly for earning interest. Considering the fact that to some extent assessee had shown specific correlation between the borrowings and advances, he held that on an estimate basis, 50 per cent of the interest earned can be allowed as interest expenditure. Thus, where the assessee had sought for entire exclusion of interest income even under the head other sources (interest expenditure being more), net interest income of Rs. 1,75,079 came to be taxed under the head other sources. It is against this 50 per cent allowance, the department is aggrieved and is in appeal before us.
6. The contention of the learned departmental Representative is that entire interest income should be taxed under the head other sources, whereas that of the learned counsel is that entire interest income should be excluded as interest paid is much more than interest earned.
6. The contention of the learned departmental Representative is that entire interest income should be taxed under the head other sources, whereas that of the learned counsel is that entire interest income should be excluded as interest paid is much more than interest earned.
7. We have considered the rival contentions and the material on record. From the facts narrated by the Commissioner (Appeals), it is evident that some interest bearing funds have been utilised for earning interest income. At the same time, it is also evident that complete correlation has not been established by the assessee. Hence, the Commissioner (Appeals) has been quite fair in estimating to the extent of 50 per cent of the income as expenses incurred to earn such income. Therefore, we uphold the order of the Commissioner (Appeals) on this issue and reject the ground raised by the revenue.
7. We have considered the rival contentions and the material on record. From the facts narrated by the Commissioner (Appeals), it is evident that some interest bearing funds have been utilised for earning interest income. At the same time, it is also evident that complete correlation has not been established by the assessee. Hence, the Commissioner (Appeals) has been quite fair in estimating to the extent of 50 per cent of the income as expenses incurred to earn such income. Therefore, we uphold the order of the Commissioner (Appeals) on this issue and reject the ground raised by the revenue.
II ITA No. 2153/Mum/2000 (Assessee's Appeal):
8. In assessee's appeal, the grounds raised by it can be summarised as follows
8. In assessee's appeal, the grounds raised by it can be summarised as follows "(1) that since there was net interest payment by the assessee, there was no interest income;
(2) that net interest payment should be allowed while computing deduction under section 80HHC and that Commissioner (Appeals) ought to have allowed deduction under section 80HHC as claimed by the assessee.
(3) that Commissioner (Appeals) erred in not considering the interest income as part of profit from export business and thereby denying deduction under section 80HHC on such interest income."
9. Before we go into the merits of the case, it has to be noted that the appeal filed by the assessee is delayed by 3 years and 5 months. By its petition dated 4-4-2000, atsessee has prayed for condonation of delay. Firstly, it is submitted that the assessee's case is more or less similar to the case of Pink Star decided by the Tribunal in ITA No. 6031/Mum/1997 dated 23-2-1999.
9. Before we go into the merits of the case, it has to be noted that the appeal filed by the assessee is delayed by 3 years and 5 months. By its petition dated 4-4-2000, atsessee has prayed for condonation of delay. Firstly, it is submitted that the assessee's case is more or less similar to the case of Pink Star decided by the Tribunal in ITA No. 6031/Mum/1997 dated 23-2-1999.
Hence, in 1996 when the Commissioner (Appeals) decided the assessee's appeal, assessee did not have the benefit of the decision of Pink Star. Accordingly, when Commissioner (Appeals) decided assessee's appeal in 1996, assessee-firm was not advised to prefer an appeal against the said order. Secondly, since the case of Pink Star was decided on 23-2-1999, the same was also not available on 4-2-1999, when the assessee received the ground of appeal filed by the department.
10. We have heard the parties at length on the condonation of delay. The sum and substance of the arguments of the learned counsel is that the delay should be condoned in the interest of justice. No injustice should be caused merely on grounds of technicalities. Certain decisions have been relied upon to support the contention. The learned departmental Representative has strongly objected to the condonation of delay. Thus, we,proceed to adjudicate upon this issue first.
10. We have heard the parties at length on the condonation of delay. The sum and substance of the arguments of the learned counsel is that the delay should be condoned in the interest of justice. No injustice should be caused merely on grounds of technicalities. Certain decisions have been relied upon to support the contention. The learned departmental Representative has strongly objected to the condonation of delay. Thus, we,proceed to adjudicate upon this issue first.
11. Above we have noted the two reasons advanced by the assessee for the delay. If carefully noted, the two reasons are independent of each other. The substance of the first reason is that if the decision in Pink Star is to be followed, then interest income is eligible for deduction under section 80HHC. In the second reason it is stated that the grounds of appeal filed by the department preceded the decision in Pink Star. But as noted above in the departmental appeal, the S7 issue therein was not at all whether interest income is eligible for deduction under section 80HHC. There the issue was whether part expenses allowed by the Commissioner (Appeals) against interest income was justified. Hence, this issue had no connection whatsoever with the decision in Pink Star. If at all the assessee was aggrieved against part allowance of expenditure, the latter decision in Pink Star did not come in its way to file an appeal before the Tribunal. Admittedly, assessee was satisfied by the decision of the Commissioner (Appeals) and hence did not come forward before the Tribunal. Therefore, the second reason given by the assessee fails to pursuade us to condone the delay.
11. Above we have noted the two reasons advanced by the assessee for the delay. If carefully noted, the two reasons are independent of each other. The substance of the first reason is that if the decision in Pink Star is to be followed, then interest income is eligible for deduction under section 80HHC. In the second reason it is stated that the grounds of appeal filed by the department preceded the decision in Pink Star. But as noted above in the departmental appeal, the S7 issue therein was not at all whether interest income is eligible for deduction under section 80HHC. There the issue was whether part expenses allowed by the Commissioner (Appeals) against interest income was justified. Hence, this issue had no connection whatsoever with the decision in Pink Star. If at all the assessee was aggrieved against part allowance of expenditure, the latter decision in Pink Star did not come in its way to file an appeal before the Tribunal. Admittedly, assessee was satisfied by the decision of the Commissioner (Appeals) and hence did not come forward before the Tribunal. Therefore, the second reason given by the assessee fails to pursuade us to condone the delay.
12. Now we come to the first reason and that is, it dawned on the assessee to file an appeal only after the decision in the case of Pink Star. Otherwise it was advised not to prefer a second appeal against the order of the Commissioner (Appeals). In this connection, we may firstly refer to the decision of the Supreme Court in the case of Ramlal & Ors. v. Rawa Coal Fields ITD. AIR 1962 SC 361. In this case, while dealing with section 5 of the Limitation Act, 1908, at p. 363 of the report, the court observed that the first consideration is that the expiration of the period of limitation prescribed for making an appeal gives rise to a right in favour of the decree-holder to treat the decree as binding between the parties. In other words, when the period of limitation prescribed has expired the decree-holding has obtained a benefit under the law of limitation to treat the decree as beyond challenge, and this legal right which has accrued to the decree-holder by lapse of time should not be light-heartedly disturbed. The other consideration which cannot be ignored, court noted, is that if sufficient cause for excusing delay is shown discretion is given to the court to condone delay and admit the appeal. This discretion has been deliberately conferred on the court in order that judicial power and discretion in that behalf should be exercised to advance substantial justice.
12. Now we come to the first reason and that is, it dawned on the assessee to file an appeal only after the decision in the case of Pink Star. Otherwise it was advised not to prefer a second appeal against the order of the Commissioner (Appeals). In this connection, we may firstly refer to the decision of the Supreme Court in the case of Ramlal & Ors. v. Rawa Coal Fields ITD. AIR 1962 SC 361. In this case, while dealing with section 5 of the Limitation Act, 1908, at p. 363 of the report, the court observed that the first consideration is that the expiration of the period of limitation prescribed for making an appeal gives rise to a right in favour of the decree-holder to treat the decree as binding between the parties. In other words, when the period of limitation prescribed has expired the decree-holding has obtained a benefit under the law of limitation to treat the decree as beyond challenge, and this legal right which has accrued to the decree-holder by lapse of time should not be light-heartedly disturbed. The other consideration which cannot be ignored, court noted, is that if sufficient cause for excusing delay is shown discretion is given to the court to condone delay and admit the appeal. This discretion has been deliberately conferred on the court in order that judicial power and discretion in that behalf should be exercised to advance substantial justice.
13. Applying the above principles to the facts of the present case, so far as the first consideration is concerned, non-filing of appeal by the assessee before the. end of limitation period, created a vested right in the revenue. The revenue, therefore, had a legitimate right over the tax revenue accruing to it as a result of the order of the Commissioner (Appeals). This right, as discussed above, should not be hghtheartedly disturbed.
13. Applying the above principles to the facts of the present case, so far as the first consideration is concerned, non-filing of appeal by the assessee before the. end of limitation period, created a vested right in the revenue. The revenue, therefore, had a legitimate right over the tax revenue accruing to it as a result of the order of the Commissioner (Appeals). This right, as discussed above, should not be hghtheartedly disturbed.
14. However, the other consideration is that if sufficient cause for delay is shown, court can exercise discretion to condone the delay if it feels that the condonation shall advance substantial justice. Thus, two ingredients are essential. First, that there should be sufficient cause, and second admission of the sufficient cause would result in substantial justice. Now what would constitute sufficient cause is explained by the Supreme Court in the case of Ajit Singh Thakur Singh & Anr. v. State of Gujarat (1981) 1 SCC 495. The Supreme Court observed that a party is entitled to wait until the last day of limitation for filing an appeal. But when it allows limitation to expire and pleads sufficient cause for not filing the appeal earlier, the sufficient cause must establish that because of some event or circumstances arising before limitation expired it was not possible to file the appeal within time. No event or circumstances arising after the expiry of limitation can constitute such sufficient cause. The Court further observed that there may be events or circumstances subsequent to the expiry of limitation which may further delay the filing of the appeal. But that the limitation has been allowed to expire without the appeal being filed must be traced to a cause arising within the period of limitation. In the Present case, admittedly, the assessee was satisfied by the order of the Commissioner (Appeals) not only tin the limitation expired, but well beyond that upto three years and five months. In other words, there was no circumstances at all before the limitation expired which prevented the assessee from filing the appeal.
14. However, the other consideration is that if sufficient cause for delay is shown, court can exercise discretion to condone the delay if it feels that the condonation shall advance substantial justice. Thus, two ingredients are essential. First, that there should be sufficient cause, and second admission of the sufficient cause would result in substantial justice. Now what would constitute sufficient cause is explained by the Supreme Court in the case of Ajit Singh Thakur Singh & Anr. v. State of Gujarat (1981) 1 SCC 495. The Supreme Court observed that a party is entitled to wait until the last day of limitation for filing an appeal. But when it allows limitation to expire and pleads sufficient cause for not filing the appeal earlier, the sufficient cause must establish that because of some event or circumstances arising before limitation expired it was not possible to file the appeal within time. No event or circumstances arising after the expiry of limitation can constitute such sufficient cause. The Court further observed that there may be events or circumstances subsequent to the expiry of limitation which may further delay the filing of the appeal. But that the limitation has been allowed to expire without the appeal being filed must be traced to a cause arising within the period of limitation. In the Present case, admittedly, the assessee was satisfied by the order of the Commissioner (Appeals) not only tin the limitation expired, but well beyond that upto three years and five months. In other words, there was no circumstances at all before the limitation expired which prevented the assessee from filing the appeal.
15. And whether subsequent decision of a court can constitute sufficient cause, we have a direct ruling on the issue of the Mysore High Court in the case of VV. Kudva & Anr v. Employees State Insurance Colporation, Bangalore AIR 1972 Mysore 204. The High Court, at p. 206 of the report held as follows
15. And whether subsequent decision of a court can constitute sufficient cause, we have a direct ruling on the issue of the Mysore High Court in the case of VV. Kudva & Anr v. Employees State Insurance Colporation, Bangalore AIR 1972 Mysore 204. The High Court, at p. 206 of the report held as follows "None of the decisions relied on by Mr. Hande supports his contention that a litigant who has acquiesced in the judgment of a court by not preferring an appeal within the period of limitation, can wake up and prefer an appeal after a subsequent ruling of the Supreme Court or the High Court which he considers as being favourable to him. Nor can the advice of his counsel that his case is not a fit one for appeal, which advice may turn out to be a mistaken one in the light of a subsequent ruling of the Supreme Court or the High Court, be regarded as a sufficient ground for condoning such delay."
16. The above decision talks about a subsequent ruling by the Supreme Court or High Court. The assessee's case in the present appeal is on a weaker footing inasmuch as that it has preferred an appeal on the basis of a subsequent ruling by the Tribunal. Thus, in view of the foregoing discussion, we refuse to condone the delay. Since the appeal remains unadmitted on grounds of limitation, we need not go into the merits of the issue.
16. The above decision talks about a subsequent ruling by the Supreme Court or High Court. The assessee's case in the present appeal is on a weaker footing inasmuch as that it has preferred an appeal on the basis of a subsequent ruling by the Tribunal. Thus, in view of the foregoing discussion, we refuse to condone the delay. Since the appeal remains unadmitted on grounds of limitation, we need not go into the merits of the issue.
17. In the result, the appeal of the department as well as that of the assessee are dismissed.
17. In the result, the appeal of the department as well as that of the assessee are dismissed.