2015 (7) TMI 514 - HC - Income Tax

Deduction u/s 80HHC on interest on intercorporate deposits - ITAT allowed claim - Held that - The deduction allowed under Section 80HH of the Act is in the form of incentive for establishment of an industry in a backward area. The interest paid on intercorporate deposits can by no means is said to be an activity of the industry so established. When the making of intercorporate deposits itself is not part of the manufacturing activity, the question of the income derived therefrom being treated as qualified for deduction under Section 80HH of the Act, does not arise.- Decided in favour of revenue. Disallowance of lease rent - ITAT allowed claim - Held that - Necessary facts are not placed before this Court. In case the lease is referable to, or connected with the principal activity of manufacture, the deduction can certainly be allowed. However, if the principal activity is only of manufacturing drugs, it is difficult to infer the leasing of any machinery or premises as part of that activity. At any rate, the Tribunal also did not analyse and record a finding that the leasing was part of the principal activity of the respondent. Therefore, we find that the view taken by the Tribunal cannot be sustained in law. - Decided in favour of revenue.

Summary

Issues:
1. Deduction under Section 80HH of the Income Tax Act for interest on intercorporate deposits.
2. Deduction under Section 80HH of the Income Tax Act for lease rent.

Analysis:
1. The respondent, a manufacturer and exporter of drugs, claimed deductions under Section 80HH for interest on intercorporate deposits and lease rent. The Commissioner granted relief for two claims, while the Tribunal allowed relief for the remaining two. The High Court focused on the deductions for interest on intercorporate deposits. It held that such interest does not qualify for deduction under Section 80HH as it is not part of the manufacturing activity. Referring to a previous case, the Court emphasized that income from intercorporate deposits cannot be considered for the incentive meant for establishing an industry in a backward area. The Court concluded that the interest on intercorporate deposits does not meet the criteria for deduction under Section 80HH, affirming the Tribunal's decision to grant relief was incorrect.

2. The High Court also addressed the issue of deduction for lease rent amounting to &8377;25,000. It noted that the Tribunal did not provide sufficient facts to determine if the lease was related to the manufacturing activity. The Court highlighted that for the deduction to be allowed, the lease should be connected with the principal manufacturing activity. However, since the Tribunal did not establish this connection or analyze if leasing was part of the principal activity, the Court found the Tribunal's decision unsustainable in law. Therefore, the High Court allowed the appeal, setting aside the Tribunal's order on both the deductions. The Court did not award costs and disposed of all related petitions.