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2017 (7) TMI 1344 - AT - Income TaxCharacterization of income - interest income from H P SEB - income from other sources or business and profession - HELD THAT - Compulsory security deposits made by the assessee with the Electricity Board for obtaining / running of the electricity connection were not made by the assessee not for investment purposes rather the same were mandatory required to be made for getting electric connection for operating / running of the manufacturing activity of the assessee. The nature of the income from the said activity is to be gauged by looking at the purpose and object of such deposits. The purpose of the deposits in our view is not for an investment and earning of interest income but for obtaining of the electricity connection required for manufacturing / business activity of the assessee. The incidental income if any earned therefrom is thus is to be treated as business income of the assessee as the same is the outcome of the deposits made for business purposes The said income earned from the security deposits against the business expenses and in is eligible to be set off particular the interest expenditure incurred by the assessee on the loan amount borrowed from the bank / financial institutions. Allow this ground of the assessee and hold that the interest income earned by the assessee on security deposits from H P SEB is to be treated as business income of the assessee and the assessee is entitled to set off the same against the business expenditure. Reducing the income from interest from H P SEB rent received Misc. receipt etc. from the profits of the unit eligible for deduction u/s 80IC - HELD THAT - Though the assessee is entitled to netting of such income against business expenditure but the assessee is not entitled to include the said income in the eligible profits of the undertaking in view of the laws laid down by the Hon ble Supreme Court in the case of Pandian Chemicals Ltd Vs. CIT 2003 (4) TMI 3 - SUPREME COURT Income from rent received - same analogy can be applied and the same is not the income derived by the undertaking and hence is not eligible for deduction u/s 80IC Amount towards Misc. Receipts assessee has stated at bar that he does not press this issue because of smallness of the amount however the issue on merit regarding the admissibility of the said receipt towards deduction u/ s 801C be kept open. We accordingly dismiss this issue of Misc. receipts holding that the dismissal of the above claim will not have any precedential value. The issue regarding the admissibility of such a claim is kept open to be adjudicated at appropriate time / case. Not treating the interest reimbursement received under Technology Upgradation Fund Scheme (TUFS) as capital receipt - The reimbursement of the interest expenditure under the TUFS scheme was not an income of the assessee rather the same was reimbursement of the expenditure incurred by the assessee. However the issue next to be considered is as to whether the assessee had already claimed the said interest expenditure in any previous year and if yes it will amount to allowing double deduction benefit to the assessee. Assessee has stated that though as per the instructions of his client the assessee upto the extent of reimbursement of the interest expenditure as per TUFS scheme has not claimed the same as expenditure in earlier years. He however has submitted that he has no objection if this aspect is examined / verified by the Assessing officer. We accordingly restore this issue to the file of the Assessing officer for the limited purpose to examining as to whether the assessee has already claimed deduction of expenditure including the amount reimbursed to the assessee under TUFS scheme? If it is found that the assessee has not so claimed it as expenditure in earlier years the assessee will be entitled to the netting of the said reimbursement amount against the interest expenditure. Interest income received on delayed payments from customers - whether is business income or income from other sources - HELD THAT - CIT (A) has relied upon the decision of the Hon ble Jurisdictional Punjab Haryana High Court High Court in the case of Phatela Cotgin Industries (P) Ltd v CIT 2007 (5) TMI 226 - PUNJAB AND HARYANA HIGH COURT wherein as held that the interest which is received on delayed payment on account of sale to customers of the manufactured goods can clearly be termed to be income derived from an industrial undertaking and distinct from income on account of interest received from fixed deposits. The Ld. DR has not pointed out any case law contrary to the above proposition of law laid by the Hon ble Jurisdictional High Court. The issue is thus squarely covered in favour of the assessee Treating the activity of twisting and texturing of yarn as manufacturing activity for the purpose of deduction u/s 80IC - HELD THAT - As relying on EMPTEE POLY-YARN P. LTD. 2008 (2) TMI 313 - BOMBAY HIGH COURT there is no infirmity in the order of the CIT (A) in holding that the conversion of yarn into thread by the assessee company amounts to manufacturing activity and therefore the income earned form such activity is eligible for deduction u/ s 80IC of the Act. There is no merit in this ground of appeal of the Revenue and the same is accordingly dismissed. Eligibility of the insurance claim u/ s 80IC - HELD THAT -The purpose of insurance is always to get indemnified against any unforeseen loss. However the question before us is whether such reimbursement / insurance claim has been paid to the assessee on account of Capital loss or Revenue loss. We accordingly direct the Assessing officer to examine as to whether the insurance claim has been paid to the assessee in view of the loss on capital assets or in view of loss on business assets. If the same is found to be on account of claim of loss of business assets assessee will be entitled to set off of the same against the business expenses Income earned by the asses see from brokerage on ocean freight is eligible for deduction u/ s 80IC
Issues Involved:
1. Classification of interest income from HPSEB. 2. Eligibility of certain incomes for deduction under Section 80IC of the Income Tax Act, 1961. 3. Treatment of interest reimbursement under the Technology Upgradation Fund Scheme (TUFS). 4. Classification of interest income on delayed payments from customers and suppliers. 5. Determination of whether the process of converting yarn into thread constitutes a manufacturing activity. 6. Eligibility of various receipts for deduction under Section 80IC. Detailed Analysis: 1. Classification of Interest Income from HPSEB: The assessee contested the classification of interest income from the security deposit made with the Electricity Board (HPSEB) as 'Income from Other Sources' instead of 'Income from Business and Profession.' The Tribunal held that the interest income earned from security deposits made for obtaining electricity connections should be treated as 'business income' since it is incidental to the business activity. Consequently, this income is eligible to be set off against business expenditure. 2. Eligibility of Certain Incomes for Deduction under Section 80IC: The assessee challenged the reduction of incomes such as interest from HPSEB, rent received, and miscellaneous receipts from the profits eligible for deduction under Section 80IC. The Tribunal upheld the CIT (A)'s decision that these incomes are not derived from the undertaking and thus are not eligible for deduction under Section 80IC. The Supreme Court's ruling in 'Pandian Chemicals Ltd Vs. CIT' was cited to support this decision. 3. Treatment of Interest Reimbursement under TUFS: The issue was whether the interest reimbursement received under the Technology Upgradation Fund Scheme (TUFS) should be treated as a capital receipt. The Tribunal agreed with the CIT (A) that the reimbursement is not an independent source of revenue but a reimbursement of interest expenditure incurred. The Tribunal remanded the issue to the Assessing Officer to verify if the assessee had claimed the interest expenditure in previous years to avoid double deduction. 4. Classification of Interest Income on Delayed Payments from Customers and Suppliers: The Revenue's appeal contested the CIT (A)'s decision to classify interest income on delayed payments from customers and suppliers as 'business income' instead of 'Income from Other Sources.' The Tribunal upheld the CIT (A)'s decision, relying on the Punjab & Haryana High Court's ruling in 'Phatela Cotgin Industries (P) Ltd v CIT,' which held that such interest income is derived from the industrial undertaking and thus qualifies as 'business income.' 5. Determination of Whether the Process of Converting Yarn into Thread Constitutes a Manufacturing Activity: The Revenue argued that the process of converting yarn into thread does not constitute manufacturing. The Tribunal upheld the CIT (A)'s decision, noting that the process results in a distinct product with different physical and chemical properties, thus qualifying as manufacturing. The Tribunal cited the Bombay High Court's decision in 'CIT vs. Emptee Poly Yarn (P) Ltd' to support this conclusion. 6. Eligibility of Various Receipts for Deduction under Section 80IC: The Revenue challenged the CIT (A)'s decision to treat certain receipts, such as insurance claims, brokerage on ocean freight, interest reimbursement under TUFS, and interest received from customers and suppliers, as eligible for deduction under Section 80IC. The Tribunal held that: - Insurance claims should be examined to determine if they pertain to capital or business assets. - Brokerage on ocean freight is eligible for deduction, as previously decided in 'VMT Spinning Co. Ltd vs. Addl CIT.' - Interest reimbursement under TUFS had already been addressed and remanded for verification. - Interest received from customers and suppliers qualifies as 'business income' based on the 'Phatela Cotgin Industries' ruling. Conclusion: The appeals were resolved with the assessee's appeals being partly allowed and the Revenue's appeals being dismissed for statistical purposes. The Tribunal's decisions were guided by precedents from higher courts and a detailed examination of the nature of the incomes and their relation to the business activities.
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