Madras H.C : The interest income derived by the assessee from funds in connection with letter of credit is income derived from the profits of the business of the industrial undertaking so as to be entitled to get the benefit of s. 10A

High Court Of Madras

CIT vs. Menon Impex (P) Ltd.

Sections 10A

Asst. Year 1985-86

R. Jayasimha Babu & K. Raviraja Pandian, JJ.

Tax Case No. 674 of 1995

2nd September, 2002

Counsel Appeared

T. Ravikumar, for the Applicant : P.P.S. Janardhanaraja, for the Respondent

JUDGMENT

R. Jayasimha Babu, J. :

The question referred is as to ‘whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the interest income derived by the assessee from funds in connection with letter of credit is income derived from the profits of the business of the industrial undertaking so as to be entitled to get the benefit of s. 10A of the IT Act, 1961’.

The assessee had set up a new industrial undertaking in Kandla Free Trade Zone for the manufacture of light engineering goods. The goods therein were exported during the asst. yr. 1985-86. In the course of the business of that industrial undertaking, the assessee was required to open letters of credit with banks who had as a condition for issuing such letter required the assessee to make deposits. On those deposits the assessee earned interest.

The assessee’s claim for treating that amount of interest income as income derived from the newly set up industrial undertaking and treating that income as exempt under s. 10A of the IT Act, 1961, was negatived by the AO and on appeal by the CIT(A), but was allowed by the Tribunal. Sec. 10A of the Act provides that the profits and gains derived by an assessee from an industrial undertaking to which that section applies shall not be included in the total income of the assessee. The Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC) has held that the words “derived from” are narrower in scope than the words “attributable to”.

In the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC), the Supreme Court observed that, the word “derived” is usually followed by the word “from” and it means “get, to trace from a source; arise from, originate in, show the origin or formation of”. It was pointed out that unless the source of the income is from an industrial undertaking, such income cannot be regarded as “derived from” industrial undertaking. It was held that the income derived from sale of import entitlements could only be said to be the export promotion scheme and not the industrial undertaking. It was also observed by the Court that where nexus between profits and gains and the industrial undertaking was not direct, but incidental, such income could not have been regarded as having been derived from industrial undertaking.

In this case the interest received by the assessee was on deposits made by it in the banks. It is that deposit which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letter of credit which letter of credit was in turn used for the purpose of the business of the industrial undertaking does not establish a direct nexus between the interest and the industrial undertaking.

The Tribunal, therefore, was in error in holding that there was direct nexus between the two. The question referred to us is answered in favour of the Revenue and against the assessee.

[Citation : 259 ITR 403]

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