2014 (12) TMI 723 - HC - Income Tax

Computation of deduction u/s 80HH Interest earned from debtors on delayed payment - Whether the Tribunal is correct in holding that the interest earned from Trade Debtors on account of delayed payment should be treated as profits derived from the Industrial Undertaking of the assessee for the purpose of computing the relief u/s 80HH Held that - Assessee was undertaking only one activity viz., manufacture of cold roll strips - The income posted by him in the income tax returns comprised mostly of the sale proceeds of product manufactured by it - whatever may be the fluctuations in the trade in relation to a product, what becomes relevant from the point of view of Section 80HH of the Act, is the profit and gain, which the assessee has derived from the activity - not only from the point of view of Section 80HH of the Act but also in the ordinary parlance, the interest paid by the purchaser on account of bleated payment, becomes part of the consideration and partakes the character of price relying upon CIT v. Raja Bahadur Kamakhaya Narayan Singh 1948 (7) TMI 1 - Privy Council - the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties - It cannot be separated from the other amounts granted to the assessee under the awards and treated as income from other sources thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Claim for deduction under Section 80HH of the Income Tax Act, 1961 disallowed by Assessing Officer.
2. Appeal allowed by Commissioner (Appeals) but dismissed by Income Tax Appellate Tribunal.
3. Appeal by Revenue under Section 260-A of the Act challenging the Tribunal's decision.

Analysis:

1. The primary issue in this case revolves around the deduction claimed under Section 80HH of the Income Tax Act, 1961 by an industrial undertaking for interest on belated payment of product purchasers. The Assessing Officer disallowed the deduction, leading to subsequent appeals by the respondent. The crux of the matter is whether the interest earned from trade debtors on delayed payment should be considered as profits derived from the industrial undertaking for the purpose of computing relief under Section 80HH of the Act.

2. The appellant's argument emphasized that only profits and gains directly derived from the manufacturing activity qualify for deduction under Section 80HH, excluding interest on belated payments. Reference was made to the Supreme Court judgment in Commissioner of Income Tax vs. Pandian Chemicals Ltd. to support this stance. On the other hand, the respondent contended that interest on delayed payments is an integral part of the sale consideration as per trade practices and legal mandates, citing relevant case laws to strengthen their position.

3. The court delved into the provisions of Chapter VIA of the Act, highlighting the legislative intent to encourage industrial activities through deductions. The interpretation of the term "derived from" in various sections of the Act was discussed, emphasizing the importance of analyzing the actual profits and gains derived from the industrial undertaking for eligibility under Section 80HH. The court noted that interest on belated payments, although part of the consideration, should align with the purpose and scope of the deduction provision.

4. Examining the specific facts of the case, where the respondent's income primarily consisted of sale proceeds from manufacturing activities, the court evaluated the treatment of interest on delayed payments. It was observed that the interest component, though part of the consideration, did not directly relate to the manufacturing activity's profits and gains. Drawing parallels to previous judicial decisions, including the Privy Council and Supreme Court rulings, the court emphasized the need for a clear nexus between the income source and the industrial undertaking to qualify for deductions under Section 80HH.

5. Ultimately, the court dismissed the appeal, affirming the Tribunal's decision to disallow the deduction for interest on belated payments. The judgment underscored the importance of aligning income sources with the specific provisions of the Income Tax Act to determine eligibility for deductions, thereby upholding the principles of tax law and economic incentives for industrial development.