2003 (9) TMI 702 - AT - Income Tax

Summary

Issues Involved:
1. Whether the interest income earned on fixed deposits can be excluded from the net profit of business while computing deduction under section 80-I of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Interest Income and Section 80-I Deduction:
The primary issue in this appeal was whether the interest income of Rs. 25,76,073 earned on fixed deposits should be excluded from the net profit of business while computing deduction under section 80-I of the Income-tax Act. The assessee company, engaged in the manufacture of machinery and turnkey projects, claimed a deduction under section 80-I, which the Assessing Officer reduced by excluding the interest income on the grounds that it was not derived from the industrial activity of the assessee.

2. Assessee's Argument:
The assessee argued before the Commissioner (Appeals) that the interest income should not be excluded when calculating the deduction under section 80-I. The company contended that the fixed deposits were made to provide performance guarantees and open Letters of Credit (L/C) necessary for its business operations, and thus the interest income was attributable to the business of manufacturing.

3. Commissioner (Appeals) Decision:
The Commissioner (Appeals) accepted the assessee's argument, holding that the fixed deposits were essential for the business operations and the interest income should be considered as business income. Consequently, the interest income was deemed directly linked to the industrial undertaking, and the amount of Rs. 25,76,073 was not deducted from the net profit while computing the deduction under section 80-I.

4. Department's Appeal:
The department appealed against this decision, arguing that the interest income did not originate from the industrial undertaking and thus should not be included for deduction under section 80-I. The department relied on the case of Dy. CIT v. Lupin Agrochemical (I) Ltd., where it was held that income from interest, even if considered business income, was not derived from an industrial undertaking.

5. Tribunal's Analysis:
The Tribunal examined the arguments and relevant case laws, including Asstt. CIT v. Gallium Equipment (P.) Ltd., where it was held that interest on FDRs linked to business operations could be considered as derived from an industrial undertaking. However, in the case of Lupin Agrochemical (I) Ltd., it was determined that interest income from bank deposits was not derived from the industrial undertaking.

6. Decision:
The Tribunal concluded that the interest income from fixed deposits did not have a direct and immediate nexus with the industrial undertaking. The income was considered incidental to the business operations rather than an operational income of the industrial undertaking. Therefore, the interest income could not be termed as derived from the industrial undertaking and was not eligible for deduction under section 80-I.

7. Supporting Case Laws:
The Tribunal referred to the decision of the Hon'ble Supreme Court in Pandian Chemicals v. CIT, which held that the term 'derived from' requires a direct nexus with the industrial undertaking. The Tribunal also cited the Privy Council's decision in CIT v. Raja Bahadur Kamakhaya Narayan Singh, emphasizing that interest on arrears of rent is not derived from land, drawing a parallel to the interest on fixed deposits not being derived from the industrial undertaking.

8. Conclusion:
The Tribunal allowed the department's appeal, holding that the interest income from fixed deposits could not be included for deduction under section 80-I. The decision of the Commissioner (Appeals) was overturned, and the interest income was excluded from the net profit for the purpose of computing the deduction under section 80-I.