2006 (11) TMI 366 - AT - Income Tax

Summary

Issues Involved:
1. Computation of deduction under section 80-IB of the Income-tax Act, 1961.
2. Eligibility of interest income for deduction under section 80-IB.

Detailed Analysis:

1. Computation of Deduction Under Section 80-IB:

The primary issue in this appeal is the computation of deduction under section 80-IB of the Income-tax Act, 1961. The assessee contended that the interest income should not be deducted from the eligible profits of the undertaking for the purpose of computing the deduction under section 80-IB. The Assessing Officer (AO) and the CIT (Appeals) both held that the interest income received by the assessee could not be considered as derived from the business of manufacturing toughened glasses and other manufacturing activities, thus, it should be deducted from the income of the eligible undertaking.

2. Eligibility of Interest Income for Deduction Under Section 80-IB:

Interest on Fixed Deposits:
The assessee received interest of Rs. 48,680 on fixed deposits placed with the bank. The court referred to the decision in the case of Universal Radiators (P.) Ltd., where it was held that interest on fixed deposits used as security for borrowing money from the bank does not have a direct relationship with the business of the priority industry. Therefore, the interest received on such deposits cannot be considered as profit or gain attributable to the business of the eligible undertaking. Consequently, the interest on fixed deposits is not eligible for deduction under section 80-IB.

Interest on Deposits with Suppliers:
The assessee received interest of Rs. 56,411 on deposits placed with suppliers. The court relied on the decision in the case of English Electric Company of India Ltd., where it was held that interest on deposits placed with suppliers is attributable to the business of the priority industry. Since the deposits are necessary for the business and have a direct nexus with the business activities, such interest is considered as derived from the business of the eligible undertaking. Therefore, the interest on deposits with suppliers is eligible for deduction under section 80-IB.

Interest on Delayed Payment of Sale Proceeds:
The assessee received interest of Rs. 25,87,648 from customers on account of delayed payment of sale consideration. The court referred to the decision in the case of Nirma Industries Ltd., where it was held that interest on delayed payment of sale proceeds partakes the character of sale consideration and is entitled to deduction under section 80-I. Since the interest is charged for expeditious recovery of sale proceeds, it is considered as derived from the business of the eligible undertaking. Therefore, the interest on delayed payment of sale proceeds is eligible for deduction under section 80-IB.

Netting of Interest:
The assessee argued that since there was an overall deficit in the interest account, no amount should be deducted from the profits derived from the eligible undertaking. However, the court held that the principle of netting is not applicable in this context. The deduction under section 80-IB is based on profits and gains derived from the business of the undertaking, and not merely on the computation of business income. Therefore, the netting principle cannot be applied to determine the eligibility of interest income for deduction under section 80-IB.

Conclusion:
In conclusion, the court held that interest received from suppliers and interest received from customers on delayed payment of sale consideration are eligible for deduction under section 80-IB, while interest received from the bank is not eligible for such deduction. The appeal was partly allowed, granting the assessee partial relief.