2013 (9) TMI 443 - AT - Income Tax

Deduction u/s 80IA - Whether Clauses (a), (b) and (c) of sec. 80IA(4)(iv) are mutually exclusive - distribution of power within the industrial park area. - CIT disallowed deduction holding that all clauses are mutually exclusive - Held that - legislative intention was to afford the tax benefit to all undertakings which were engaged in any of the three activities - clauses (a) and (b) of sub. Sec. 4(iv) to sec. 80IA was introduced with effect from 1.4.2000 and clause (c) was introduced only with effect from 1.4.2005, i.e., they were not introduced in one go - These three types of undertakings referred to in the said sub-clauses (a), (b) and (c) are different and independent of each other. Thus while dealing with one sub-clause, inference need not and cannot be drawn from the other sub- clause - Following decision of DCIT Vs. Maharaja Shree Umaid Mills Ltd. 2008 (6) TMI 255 - ITAT JAIPUR-B - Decided against assessee. Interpretation of clause (b) of sec. 80IA(4)(iv) - CIT(A) has taken the view that the said clause provides exemption only to the profit derived from laying a network of new transmission or distribution lines - Held that - the harmonious construction of clause (b) and the proviso there under, would be that the deduction u/s 80IA of the Act shall be allowed in respect of the profits derived from transmission or distribution of power through the new network. Had the intention of the parliament was to give deduction only to the undertaking which undertakes the work of laying network of new transmission or distribution lines and not to the undertaking which transmits or distributes the power, then clause (b) would have been worded accordingly and there would have been no necessity to insert a proviso for the said purpose. - Decided in favor of assessee. Deduction u/s 80IA - Interest income - Held that - There is a difference between income from business and Profits and gains derived from the eligible undertaking . Not all the business income can be classified as Profits and gains derived from the eligible undertaking - for application of the words derived from , there must be a direct nexus between the profits and gains and the undertaking - the nexus of interest income with the business of the undertaking is not direct but incidental. The source of interest income is only bank deposits and security deposits - Following decision of CIT Vs. Sterling foods 1999 (4) TMI 1 - SUPREME Court - Decided against assessee.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80IA of the Income Tax Act.
2. Assessment of interest income under "income from other sources" and its eligibility for deduction under Section 80IA.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80IA:

The primary issue revolves around whether the assessee is eligible for deduction under Section 80IA(4)(iv)(b) of the Income Tax Act. The assessee, a Kerala State-owned public limited company, engaged in providing infrastructural facilities, claimed this deduction for income generated from the distribution of power. The assessee laid a network of new distribution lines and claimed the deduction based on these activities.

The Assessing Officer (AO) rejected this claim, arguing that the assessee must comply with all clauses (a), (b), and (c) of Section 80IA(4)(iv) cumulatively. Since the assessee did not generate power as specified in clause (a), the AO deemed the assessee ineligible for the deduction. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that clauses (a), (b), and (c) are mutually exclusive. Nonetheless, the CIT(A) held that the deduction should be restricted to profits derived from laying new lines, not from the mere distribution of power.

Upon review, the Tribunal upheld the CIT(A)'s view that the clauses are mutually exclusive, supported by legislative intent and previous judicial interpretations. The Tribunal also clarified that the proviso to clause (b) should be harmoniously construed, allowing deduction for profits derived from transmission or distribution through the new network, not just from laying the lines. Thus, the Tribunal set aside the CIT(A)'s order, holding the assessee eligible for the deduction under Section 80IA(4)(iv)(b) for profits from distributing power through the new network.

2. Assessment of Interest Income:

The second issue pertains to whether the interest income earned from bank deposits and security deposits should be assessed under "income from other sources" and its eligibility for deduction under Section 80IA. The assessee treated the interest income as business income and claimed the deduction. However, both the AO and CIT(A) rejected this claim. The CIT(A) relied on the Supreme Court's decision in Pandian Chemicals (262 ITR 278) and the Punjab Haryana High Court's ruling in Nahar Exports Ltd (288 ITR 494).

The Tribunal examined the nature of the interest income and concluded that even if it were assessed as business income, it could not be considered as "profits and gains derived from the eligible undertaking" under Section 80IA. The Tribunal emphasized the distinction between "income from business" and "profits and gains derived from the eligible undertaking," noting that the latter requires a direct nexus with the undertaking's activities. In this case, the interest income's source was bank deposits and security deposits, making its nexus with the business incidental rather than direct. Consequently, the Tribunal upheld the CIT(A)'s decision to reject the deduction claim for interest income under Section 80IA.

Conclusion:

The appeal was partly allowed. The Tribunal ruled in favor of the assessee regarding the eligibility for deduction under Section 80IA(4)(iv)(b) for profits derived from distributing power through the new network. However, it upheld the rejection of the deduction claim for interest income under Section 80IA. The case was remanded to the AO to verify the assessee's computation of the deduction amount.