Madras H.C : if source of interest is the bank deposit and not the business of the respondent undertaking , deduction u/s 80-I not allowble

High Court Of Madras

CIT Vs. Tribalogy India Ltd.

Assessment Year : 1989-90 To 1991-92

Section : 80-I

F.M. Ibrahim Kalifulla And N. Kirubakaran, JJ.

Tax Case (Appeal) Nos. 454 To 456 Of 2004

November  1, 2010

JUDGMENT
 
F.M. Ibrahim Kalifulla, J. : Though notice was duly served on the respondent by way of substituted service, there is no representation either in person or through counsel. We therefore, proceed to decide the appeals on merits.

2. The substantial questions of law raised in these appeals read as under :

“(1) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the earning of interest income from bank deposits will have to be treated as business income ?

(2) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that there was nexus between the deposits made and the business and therefore, interest earned on the deposits was part of the industrial undertaking ?”

3. The Revenue has come forward with these appeals. Challenge is to the order of the Tribunal “C” Bench, Chennai dt. 17th July, 2003 passed in ITA Nos. 1518 to 1520/1995. Assessment years are 1989-90, 1990-91, 1991-92.

4. Brief facts which are required to dispose of these appeals could be briefly stated as under :
Respondent is a company engaged in the manufacture of chimney and furnace. The assessee claimed that interest income earned from certain deposits made with Fidelity Company by way of fixed deposit towards security should be treated as income derived from its industrial undertaking. On that basis, respondent assessee claimed the benefit as provided under section 80-I of the IT Act. The assessing authority treated such interest income as “from other source” and that the same cannot be treated as “part of business income”. The respondent preferred an appeal and the CIT(A) upheld the contention of the respondent/assessee and directed the AO to recompute the reduction under section 80-I, treating the interest receipt as part of the business income. The Tribunal having confirmed the said view of the CIT(A), Revenue has come forward with this appeal.

5. We heard Mr. Ravi Kumar, learned senior standing counsel for the appellant. The learned counsel after drawing our attention to section 80-I, pointed out that in as much as the deposits made by the appellant and the interest income earned by it has absolutely no relation to its manufacturing activity of chimney and furnace, the said interest income can only be construed as income from other sources and not as income derived from the industrial undertaking. In support of his submission, the learned counsel placed reliance upon the decision of Division Bench of this Court in CIT v. . Pandian Chemicals Ltd. [1998] 233 ITR 497. It was also confirmed by the Supreme Court in the decision Pandian Chemicals Ltd. v.. CIT [2003] 262 ITR 278/129 Taxman 539 and a recent decision of the Hon’ble Supreme Court in Liberty India v. . CIT [2009] 317 ITR 218/183 Taxman 349.

6. To appreciate the contention of the learned standing counsel, we deem it fit and proper to extract the relevant part of the above-referred to decisions. In Pandian Chemicals Ltd.’s case(supra) at p. 506, the Division Bench has stated the legal position as regards the expression “derived from” in the following words :

“A study of various case laws clearly indicates that a restricted meaning is given when the legislature uses the expression ‘derived from’. Though the assessee has necessarily to make the deposit with the Electricity Board for running the industry and the power supply will not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board cannot be said to have been derived from the industrial undertaking. The immediate source of interest is the deposit itself, and the effective source of the genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. Hence, the interest income cannot be held to be derived from the industrial undertaking. In other words, the immediate and effective source of the interest is the deposit and not the industrial undertaking.”

7. In Pandian Chemicals Ltd.’s case( supra), while confirming the above view of the Division Bench, the Hon’ble Supreme Court has held as under :

“This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar v. . CIT [1955] 27 ITR 1 (SC). It is clear, therefore, that the words ‘derived’ from in section 80HH of the IT Act, 1961 must be understood as something which has direct or immediate nexus with the appellant’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself.

The learned counsel appearing on behalf of the appellant has referred to several decisions of the Madras High Court in order to contend that the words ‘derived from’ could be construed to include situations where the income arose from something having a close connection with the industrial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of CIT v. . Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad.). We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd. ( supra) with respect to those decisions to hold that they do not in any way allow the word ‘derived’ in section 80HH to be construed in the manner contended by the appellant.”

8. In the decision reported in Liberty India’s case (supra), at p. 233, para 15, the Hon’ble Supreme Court held as under :

“15. We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment.

On an analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words ‘derived from industrial undertaking’ as against ‘profits attributable to industrial undertaking’.

Hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings.”

9. A reading of the above principles laid down by the Hon’ble Supreme Court makes it clear that the expression “derived from” should be given a very strict and restricted meaning. The statement of law as declared by the Hon’ble Supreme Court to the effect that section 80-I of the Act and similar provisions provide for incentives in the form of deductions which are linked to profits and not investment, makes the position clear that such income which is directly earned from and out of the business viz., as in the case on hand, manufacture of chimneys and furnace alone, would fall within the expression “derived from”, as set out in the said provision. Since the Hon’ble Supreme Court has made it clear that there is a clear distinction between the terms “derived from” and “attributable to”, the expression “derived from” has got to be given a very strict interpretation relatable only to income derived from the business and not to any other source of deposits made. It will have to be held that applying the said principles, the interest earned by the respondent from and out of fixed deposit cannot be brought under the expression “derived from the industrial undertaking”.

10. As held by our Division Bench in the decision in Pandian Chemicals Ltd.’s case (supra), when the immediate and effective source of interest is the deposit and not the business of the respondent undertaking viz., the manufacture of chimneys and furnace, it will have to held that the respondent is not entitled to claim benefits as provided under section 80-I of the Act.

11. The questions of law are therefore, answered in favour of the Revenue. The appeals stand allowed. The orders of the CIT(A) as well as that of the Tribunal are set aside. The order of the assessing authority stands restored. No costs.

[Citation : 335 ITR 12]

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