2012 (4) TMI 454 - HC - Income Tax

Deduction u/s 80I - Invoking and exercise jurisdiction under Section 263 interest income on short term bank deposits and tank hire charges - ITAT confirmed CIT order Held that - Immediate and first source of receipt of interest income is the deposit of money and not the industrial activity. Manufacturing activity, or profit earned therefrom, is not the proximate source of the interest earned. The said interest income, therefore, cannot be treated as income earned or derived from manufacturing activity undertaken by the industrial unit. Tank hire charges were received by the appellant-assessee from the consumers to whom Ammonia was supplied. It represents payment for transportation. On query, it is accepted/stated by the appellant that these tank hire charges were separately billed and these tanks were the carriage wagons owned by the Railways. Transportation charges when separately billed and charged cannot be included in the profit and gain from manufacturing activity undertaken by an industrial unit. against assessee.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in holding that the Commissioner of Income Tax had rightly invoked and exercised jurisdiction under Section 263 of the Income Tax Act, 1961?

Detailed Analysis:

Issue 1: Invocation and Exercise of Jurisdiction under Section 263 of the Income Tax Act, 1961

Background:
The appellant-assessee, a multi-state co-operative society engaged in the manufacture and sale of Urea and Ammonia, claimed deductions under Section 80-I of the Income Tax Act for the assessment years 1993-94 and 1994-95. The deductions included interest income on short-term bank deposits and tank hire charges. The Assessing Officer allowed these deductions without objection. However, the Commissioner of Income Tax issued notices under Section 263, questioning the inclusion of these incomes in the deductions.

Commissioner's Orders:
The Commissioner modified the assessment orders, holding that the interest income and tank hire charges were not "derived from" the manufacturing activity and thus not eligible for deduction under Section 80-I. The reasoning was based on the interpretation of the term "derived from" as opposed to "attributable to," which has a narrower and more restrictive meaning. The Commissioner cited several legal precedents, including the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. vs. CIT and the Madhya Pradesh High Court's decision in CIT vs. Paras Oil Extraction Ltd., to support this interpretation.

Tribunal's Decision:
The Income Tax Appellate Tribunal dismissed the appeals of the appellant-assessee, upholding the Commissioner's orders.

Appellant's Contentions:
1. The Assessing Officer had conducted inquiries and taken a plausible view, so the original assessment order was not erroneous or prejudicial to the interest of the Revenue.
2. The interest on short-term deposits and tank hire charges were interconnected with the industrial activity and should be considered as income derived from the manufacturing activity.

Court's Analysis:
The Court found no merit in the appellant's contentions. It emphasized that the Commissioner had examined the merits of the claim and concluded that the deductions allowed were erroneous and prejudicial to the interest of the Revenue. The Court reiterated the legal distinction between "attributable to" and "derived from," emphasizing that the latter requires a direct and proximate nexus with the industrial activity.

Key Observations:
1. Interest Income: The Court held that the immediate source of interest income is the deposit of money, not the manufacturing activity. Therefore, it cannot be treated as income derived from the industrial activity.
2. Tank Hire Charges: These charges were for transportation and were separately billed. The Court noted that transportation charges, when separately billed, cannot be included in the profit and gain from manufacturing activity. The appellant failed to provide evidence that these charges were intrinsically connected to the manufacturing process.

Conclusion:
The Court concluded that the Tribunal was correct in holding that the Commissioner rightly invoked and exercised jurisdiction under Section 263. The substantial question of law was answered in favor of the Revenue and against the assessee. The Court emphasized that the provisions of the Act must be strictly construed, and the deductions claimed by the appellant were not permissible under the law.

Final Judgment:
The substantial question of law is answered in the affirmative, in favor of the Revenue, and against the assessee. There will be no order as to costs.

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