2007 (4) TMI 211 - HC - Income Tax

Expenses incurred towards repairs, depreciation and salary paid to staff looking after the transit house indirectly - Whether is not allowable as deduction while computing the income from business solely because of the provision in section 37(4A) of the Income-tax Act, 1961? Dis allowance of relief under section 80HH of the Act on the whole of interest receipts of ₹ 3,11,86,442 without setting off the interest payments of ₹ 2,35,38,917 by ITAT Held that - First question of law is no longer res integra as settled against the assessee by the hon ble Supreme Court in the case of Britannia Industries Ltd. v. CIT 2005 (10) TMI 30 - SUPREME Court 278 and in view of such determination, question No.1 need not be answered. Any interest earned by the assessee which has direct or immediate nexus with either manufacture or sale of its product has to be accepted to be an income which qualified as an income under section 80HH. Thus interest earned by the assessee from its customers for delayed payment and for bill discounting, such interest income does bear a direct and immediate nexus with the industrial undertaking of the assessee and therefore, interest earned from the customers, for delayed payment and bill discounting, are held to be income derived from the petitioners industrial undertaking and therefore, entitled for relief under section 80HH. Applying the provisions of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME Court it is of the view that interest earned by the assessee from the deposits made in bank and inter-corporate deposits, though attributable to the business of the assessee, is a step removed from the assessee s industrial undertaking and therefore, cannot be held to have been derived from the industrial undertaking in order to qualify for relief under section 80HH. Thus the interest earned by the assessee from the deposits with banks or intercorporate deposits (items Nos. 1 and 2) do not qualify for relief under section 80HH. The Income-tax Appellate Tribunal erred in disallowing relief under section 80HH of the Act in so far as interest received of ₹ 1,63,04,937 is concerned and the Tribunal also erred in disallowing set off of interest payment of ₹ 2,35,38,917 against interest income of ₹ 1,48,81,505. Appeal partly allowed.

Summary

Issues Involved:
1. Deductibility of expenses related to guest house under section 37(4A) of the Income-tax Act, 1961.
2. Eligibility of interest income for deduction under section 80HH of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Deductibility of Guest House Expenses
The first issue concerns whether expenses incurred towards repairs, depreciation, and salary paid to staff looking after the transit house are allowable as deductions while computing business income, in light of section 37(4A) of the Income-tax Act, 1961. The appellant contended that such expenses should be admissible under sections 28 to 32 of the Act and not be restricted by section 37(4). However, the Tribunal referenced the judgment in United Catalysts India Ltd. v. CIT [1998] 229 ITR 233 (Ker) and concluded that guest house expenses are not allowable. Both parties agreed that this issue has been settled by the Supreme Court in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546, which ruled against the assessee. Consequently, the court decided this question in favor of the Revenue, affirming that such expenses are not deductible.

Issue 2: Eligibility of Interest Income for Deduction under Section 80HH
The second issue pertains to the claim for deduction under section 80HH of the Act regarding interest receipts. The appellant earned interest from various sources, including bank deposits, inter-corporate deposits, customer payments, and bill discounting. The appellant argued that the interest income should be considered for relief under section 80HH as it arose from funds borrowed for the business. The Tribunal, however, disallowed the claim by relying on the Supreme Court's judgment in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, which held that interest income from deposits does not qualify as income derived from an industrial undertaking.

The appellant distinguished its case from Pandian Chemicals, arguing that the interest was earned from prudent financial management and not from deposits with an electricity board. The court agreed that interest from delayed customer payments and bill discounting has a direct and immediate nexus with the industrial undertaking and qualifies for relief under section 80HH. However, interest from bank deposits and inter-corporate deposits does not have such a nexus and therefore does not qualify.

The appellant also argued that the legislative intent behind section 80HH should be interpreted broadly, especially given the lack of amendments similar to those in section 80HHC. The court rejected this argument, stating that the clear language of section 80HH does not necessitate such an interpretation.

Conclusion:
1. The court affirmed that expenses related to the guest house are not deductible under section 37(4A) of the Income-tax Act, 1961.
2. The court ruled that interest income from delayed customer payments and bill discounting qualifies for deduction under section 80HH, but interest from bank deposits and inter-corporate deposits does not. Additionally, the court allowed the set-off of interest payments against interest income.

The appeal was partly allowed based on these conclusions.