2014 (11) TMI 563 - HC - Income Tax

Computation of profits of industrial undertaking Interpretation of section 80HHA and 80I interest income being business interest from trade debtors and on miscellaneous receipts - Held that - Following the decision in Nirma Industries Limited Versus Deputy Commissioner of Income-Tax 2006 (2) TMI 92 - GUJARAT High Court - section 80I of the Act uses the phrase derived from and hence the interest received by the assessee from its trade debtors cannot be taken into consideration for the purpose of computing profits derived from an industrial undertaking. When one reads the opening portion of section 80I of the Act it is clear that words used are gross total income of an assessee includes any profits and gains derived from an industrial undertaking - Once this is the position then, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the prescribed percentage is to be allowed - the gross total income of the assessee included profits and gains from business, and this is apparent on a plain glance at the computation in the assessment order - Both in relation to Vatva unit and Mandali unit the computation commences by taking profit as per statement of income filed alongwith return of income - the Tribunal has erred in reducing the other income received by the appellant as the entire income is incidental to manufacturing activities and therefore the deduction u/s 80-I is required to be allowed on the gross total income before deduction of 80-HHA and income from others Decided in favour of assessee. Interest from IDBI Held that - The institution with which the assessee was carrying on business is required to be borne in mind - The interest from Bajaj Institution has direct nexus with the business and therefore the interest is required to be considered as derived from business Decided in favour of assessee. The income earned from fixed deposit placed for business purpose cannot be treated as income from other source but must be seen as part of the assessee s business income - the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions and therefore the income received thereupon cannot be termed to be income from other sources Decided in favour of assessee.

Summary

Issues Involved:
1. Interpretation of sections 80HHA and 80-I of the Income Tax Act, 1961.
2. Treatment of interest income from trade debtors, miscellaneous receipts, and IDBI.
3. Treatment of dividend income, profit on sale of assets, and other miscellaneous receipts.
4. Treatment of income from the sale of spare parts, cables, repair charges, and other receipts.
5. Whether gross interest income should be excluded while computing profits for deductions under sections 80HHA and 80-I.

Issue-wise Detailed Analysis:

1. Interpretation of Sections 80HHA and 80-I:
The primary controversy revolves around the interpretation of sections 80HHA and 80-I of the Income Tax Act, 1961, particularly the phrase "derived from" used in these provisions. The Tribunal's interpretation that certain incomes do not qualify for deductions under these sections was challenged. The court referred to the decision in Nirma Industries Ltd. vs. Deputy Commissioner of Income-Tax, which clarified that the same item of receipt cannot be treated differently for computing gross total income and for computing deductions under section 80-I.

2. Treatment of Interest Income:
The court addressed whether interest income from trade debtors, miscellaneous receipts, and IDBI qualifies for deductions under sections 80HHA and 80-I. The Tribunal had excluded these incomes from the computation of profits derived from industrial undertakings. However, the court held that such interest income should be considered as part of the business income derived from the industrial undertaking, thereby qualifying for deductions. The decision was supported by the precedent set in Nirma Industries.

3. Treatment of Dividend Income and Other Miscellaneous Receipts:
The court examined whether dividend income, profit on the sale of plant and vehicle, hob work, repairing receipts, and DLI refund qualify for deductions under sections 80HHA and 80-I. The Tribunal had excluded these items from the computation of profits derived from industrial undertakings. The court, referring to the principles established in previous cases, concluded that these items should be included in the gross total income for the purpose of computing deductions.

4. Treatment of Income from Sale of Spare Parts, Cables, Repair Charges, and Other Receipts:
The court considered the treatment of income from the sale of spare parts, cables, repair charges, and other miscellaneous receipts. The Tribunal had excluded these incomes from the computation of profits derived from industrial undertakings. The court held that these incomes are incidental to the manufacturing activities and should be included in the gross total income for the purpose of computing deductions under sections 80HHA and 80-I.

5. Exclusion of Gross Interest Income:
The court addressed whether gross interest income should be excluded while computing profits for deductions under sections 80HHA and 80-I. The Tribunal had held that gross interest income should be excluded. However, the court, referring to the decision in Karnal Co-operative Sugar Mills Ltd. and other relevant cases, concluded that interest income earned from fixed deposits placed for business purposes should be treated as part of the business income and not as income from other sources.

Final Judgment:
- The appeals concerning the interpretation of sections 80HHA and 80-I and the treatment of interest income (Tax Appeals Nos. 186 of 2003 and 371 of 2002) were allowed in favor of the assessee.
- The appeal concerning the exclusion of gross interest income (Tax Appeal No. 187 of 2003) was allowed in favor of the assessee.
- The appeals concerning the treatment of small amounts of miscellaneous income (Tax Appeals Nos. 188 and 189 of 2003) were dismissed without entering into the merits of the case.