2002 (3) TMI 10 - HC - Income Tax

New Industrial Undertaking In Backward Area, Special Deduction, Export - 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that in respect of income derived from (a) interest receipts, (b) Modvat credits, and (c) International Price Rationalisation the assessee was entitled to deductions under sections 80HH and 80-I of the Income-tax Act, 1961? - 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the total turnover in section 80HHC of the Act is only the turnover relating to the export business of the assessee and not the turnover relating to other business of the assessee? - assessee while supporting the order of the Tribunal also invited our attention to Form No. 10CCAC and submitted that even the method of calculation in that form would suggest that the total turnover to be taken into account would be restricted only to the total turnover in respect of the goods to which the section applies. It will not be necessary for us to consider that argument because the interpretation of that term is clear from the language of clause (a) of sub-section (1), clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3). - In the circumstances, we answer the reference against the Revenue and in favour of the assessee.

Issues Involved:
1. Entitlement to deductions under sections 80HH and 80-I of the Income-tax Act, 1961, for income derived from interest receipts, Modvat credits, and International Price Rationalisation.
2. Interpretation of "total turnover" in section 80HHC of the Income-tax Act.

Issue-Wise Detailed Analysis:

1. Entitlement to Deductions under Sections 80HH and 80-I:
The court examined whether the income derived from interest receipts, Modvat credits, and International Price Rationalisation qualified for deductions under sections 80HH and 80-I. The assessee, an export-oriented company, claimed these incomes were part of the profits from its industrial undertaking.

Interest Receipts:
- The court differentiated between two types of interest receipts: interest on bank deposits for letters of credit and interest on delayed payments from importers.
- The court ruled that interest from bank deposits did not have a direct nexus with the industrial undertaking and was therefore not eligible for deduction under section 80HH. This decision was supported by precedents such as CIT v. Sterling Foods and Cambay Electric Supply Industrial Co. Ltd. v. CIT, which emphasized a direct nexus requirement.
- Conversely, interest on delayed payments was deemed directly related to the business of forgings and thus qualified for deductions under section 80HH.

Modvat Credits:
- The court found that Modvat credits, which are credits for excise duty paid on raw materials, were directly related to the industrial undertaking's manufacturing process. Therefore, such income was eligible for deductions under sections 80HH and 80-I.

International Price Rationalisation:
- The income from the International Price Rationalisation scheme, which provided financial incentives to make the assessee's products internationally competitive, was also deemed directly related to the industrial undertaking. Thus, it qualified for deductions under sections 80HH and 80-I.

2. Interpretation of "Total Turnover" in Section 80HHC:
The court addressed whether "total turnover" in section 80HHC should include only the turnover from the export business or the turnover from all business activities, including unrelated ones like the sale of motorcycles and television sets.

- The Tribunal had accepted the assessee's claim that "total turnover" should only include the turnover from the export business of forgings, excluding other business activities.
- The court analyzed the language of section 80HHC, especially sub-section (3)(b), which provides a formula involving "export turnover" and "total turnover."
- The court concluded that "total turnover" should be restricted to the turnover of the business related to the goods to which section 80HHC applies. Including unrelated business activities would inflate the denominator, resulting in a smaller deductible profit, contrary to the section's objective of encouraging exports.
- The court affirmed the Tribunal's conclusion that the turnover from the sale of motorcycles, spare parts, and television sets should not be included in the "total turnover" for calculating deductions under section 80HHC.

Conclusion:
- The court ruled against the assessee on the issue of interest from bank deposits, stating it did not qualify for deductions under section 80HH.
- The court ruled in favor of the assessee for interest on delayed payments, Modvat credits, and International Price Rationalisation, allowing deductions under sections 80HH and 80-I.
- On the interpretation of "total turnover," the court upheld the Tribunal's decision, restricting "total turnover" to the turnover of the export business, thus favoring the assessee.

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