2010 (11) TMI 340 - HC - Income Tax

Deduction u/s 80IB / 80I - Interest income from Bank deposits - Held by Division Bench in the decision Commissioner of Income tax vs. Pandian Chemicals Ltd. when the immediate and effective source of interest is the deposit and not the business of the respondent undertaking viz. the manufacture of chimneys and furnace it will have to held that the respondent is not entitled to claim benefits as provided under Section 80-I of the Act - Therefore answered in favour of the Revenue.

Summary

Issues involved:
1. Interpretation of interest income from bank deposits as business income.
2. Determining nexus between deposits made and business for interest income treatment.

Issue 1: Interpretation of interest income from bank deposits as business income:

The case involved a Company engaged in manufacturing chimneys and furnaces. The Company claimed interest income from fixed deposits with a company as part of its industrial undertaking income under Section 80 I of the Income Tax Act. The Assessing Authority treated the interest income as "from other source," not part of business income. The CIT Appeal supported the Company's claim, directing the Assessing Officer to re-compute the reduction under Section 80 I, considering the interest receipt as part of business income. The Tribunal upheld this view, leading to the Revenue's appeal. The Revenue argued that the interest income had no relation to the manufacturing activity and should be treated as income from other sources. Citing legal precedents, including decisions by the Supreme Court, the Revenue contended that the interest income did not directly derive from the industrial undertaking but from the deposits themselves. The Court emphasized a strict interpretation of the term "derived from," linking it to income directly earned from the business, not from other sources like deposits. The Court concluded that the interest earned from fixed deposits could not be considered "derived from the industrial undertaking," denying the Company benefits under Section 80-I.

Issue 2: Determining nexus between deposits made and business for interest income treatment:

The Court referred to legal precedents, including a Division Bench decision and Supreme Court rulings, to establish that income must have a direct or immediate nexus with the industrial undertaking to be considered derived from it. The Court highlighted that the immediate and effective source of the interest income was the deposit itself, not the business activity of manufacturing chimneys and furnaces. Relying on the principles laid down by the Supreme Court, the Court emphasized that income linked to profits from the business, not investments, qualified for deductions under Section 80-I. Therefore, the Court held that the interest earned from fixed deposits did not meet the criteria of being derived from the industrial undertaking, leading to the rejection of the Company's claim for benefits under Section 80-I. The Court ruled in favor of the Revenue, allowing the appeals and setting aside the orders of the C.I.T. Appeals and the Tribunal, restoring the assessing authority's decision without costs.