2017 (5) TMI 1595 - HC - Income Tax

Items of income not to be included whilst computing the profits derived from the business of the Gadepan I unit and were not eligible for a deduction under section 80IA - Held that - Taking into consideration the decision of the Supreme Court in ACG Associated Capsules Pvt. Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA) issue No.1 is answered in favour of assessee inasmuch as deposit which he has clubbed was statutory mandatory requirements against the Fixed Deposit receipt. In that view of the matter if there is a breach of condition of 10% will invite action. In that view of the matter it was mandatory requirement under the Act Compensation received on the machinery break down in view of decision in CIT vs. Metalman Auto (P.) Ltd. (2011 (2) TMI 330 - PUNJAB AND HARYANA HIGH COURT) it is squarely covered and issue is decided in favour of assessee against the department. Expenses should be written back 37, 40, 951/- in our considered opinion the issue is required to be answered in favour of Department and against the assessee in view of the fact that this will not form a part of income since it was written off deposit which was kept in separate account. This is not an income derived. The issue is decided in favour of Department and against the assessee. For issue on recovery of rent as relied upon decisions reported in Commissioner of Income Tax vs. Indo Swiss Jewels Ltd. and Anr. (2005 (9) TMI 47 - BOMBAY HIGH COURT) as held it is clear that the inter-corporate deposits were made by the assessee from the surplus funds that were set apart for the payment of imported machinery. That the said deposits were withdrawn and payment was made towards import of the machinery is also not questioned by the Revenue. The interest earned on the short-term deposits of the money kept apart for the purpose of business has to be treated as income earned on business and cannot be treated as income from other sources.

Issues Involved:
1. Inclusion of various types of income while computing profits for deduction under Section 80IA of the Income Tax Act.
2. Nexus of incidental incomes with the business of the undertaking.
3. Interpretation of "profits and gains derived by an undertaking."

Detailed Analysis:

Issue 1: Inclusion of Various Types of Income for Deduction Under Section 80IA

1(a) Interest on Long Term Investment:
The appellant argued that interest on long-term investments should be included in the profits derived from the business. The court referred to the Supreme Court decision in ACG Associated Capsules Pvt. Ltd. Vs. Commissioner of Income Tax, which clarified that only the net interest, which has been included in the profits of business, should be considered. Consequently, the issue was decided in favor of the assessee.

1(b) Interest on Deposits and Others:
The appellant cited the Delhi High Court decision in CIT Vs. Advance Detergents Ltd., which held that interest on deposits having a direct nexus with the business should be included in the profits. The court accepted this argument, deciding in favor of the assessee.

1(c) Compensation Received on Machinery Breakdown:
The appellant argued that compensation for machinery breakdown should be included in the business profits. The court referred to previous judgments and decided that such compensation is indeed part of the business income, ruling in favor of the assessee.

1(d) Expense Provision Written Back:
The appellant claimed that the written-back expense provision should be included in the business income. However, the court found that this does not form part of the income derived from the business as it was a written-off deposit kept in a separate account. This issue was decided in favor of the Department.

1(e) Recovery of Rent:
The appellant relied on decisions such as Commissioner of Income Tax vs. Indo Swiss Jewels Ltd. and Commissioner of Income Tax vs. Eastern Tar P. Ltd., which held that rent recovery should be treated as business income. The court agreed with this view, deciding in favor of the assessee.

1(f) Miscellaneous Income:
The appellant cited the Punjab & Haryana High Court decision in CIT vs. Metalman Auto (P.) Ltd., arguing that miscellaneous income should be included in the business profits. The court accepted this argument, ruling in favor of the assessee.

Issue 2: Nexus of Incidental Incomes with the Business of the Undertaking

The appellant argued that various incidental incomes should be considered as forming part of the profits derived from the business. The court referred to the decision in CIT Vs. Sportking India Ltd., which emphasized that the objective of Section 80-IA is to promote new investments and employment. The court found that incidental incomes, such as insurance claims for business-related damages, have a direct nexus with the business and should be included in the profits. This issue was decided in favor of the assessee.

Issue 3: Interpretation of "Profits and Gains Derived by an Undertaking"

The appellant contended that the phrase "profits and gains derived by an undertaking" should not be narrowly interpreted to exclude incidental incomes. The court referred to the Supreme Court decision in Liberty India v. CIT, which clarified that the words "derived from" are narrower than "attributable to." However, the court found that the incidental incomes in question have a direct nexus with the business and should be included in the profits. This issue was decided in favor of the assessee.

Conclusion:
The appeal was disposed of with the court deciding most issues in favor of the assessee, except for the expense provision written back, which was decided in favor of the Department. The court emphasized the importance of a direct nexus between the incidental incomes and the business of the undertaking while interpreting Section 80IA.

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