2015 (5) TMI 1244 - AT - Income Tax

Revision u/s 263 - deduction under sec.80IA - Scope of meaning of the word derive - interest income earned from deposits - whether the interest income earned by the assessee on the fixed deposits is business income derived from the industrial undertaking or it is an income from other sources? - HELD THAT - In the case of Pandian Chemicals 2003 (4) TMI 3 - SUPREME COURT the meaning of words derived from was again considered and after relying on the judgment of Cambay Electric Supply Industrial Co. Ltd. 1978 (4) TMI 1 - SUPREME COURT it was held that the expression derived from had a narrower connotation than the expression attributable to . After having considered the meaning of the words derived from , as per the various decisions of Supreme Court, in our opinion, the interest earned by the assessee from deposits made in trust and retention account maintained under the financing agreement with the lenders, cannot be considered as profits and gains of business derived from the industrial undertaking. Thus, we find no infirmity in the order of the Commissioner(Appeals) in following the judgment of the Supreme Court in the case of Pandian Chemicals Ltd. (supra). DR was of the opinion that benefit of netting of interest cannot be allowed in this case, as the interest paid and interest received do not partake the same character, as held by the Supreme Court in the case of CIT v. Keshavji Ravji 1990 (2) TMI 1 - SUPREME COURT and CIT v. V. Chinnapandi 2006 (1) TMI 65 - MADRAS HIGH COURT . Therefore, no benefit of netting of interest is allowed. Accordingly, this ground is dismissed in both the appeals. Invoking the provisions of sec.263 so as to withdraw deduction given to the assessee, after considering the interest income received from fixed deposits made with the trust and arising from trust and retention account required to be made with the intention to service debt under financing agreement as business income - The issue regarding treating the interest income earned from deposits and retention account made under financing agreement is to be considered as income from other sources. As such, the order of the Assessing Officer suffered from infirmity, which is prejudicial to the interests of the Revenue. Hence, the Commissioner of Income-tax is justified in invoking the jurisdiction under sec.263 of the Act stating that the said interest is to be considered as business income. As we have already held in earlier years that the said interest income is to be considered as income from other sources, the assessee fails on this ground also.

Summary

Issues:
1. Appeal against orders of Commissioner of Income-tax(Appeals) for assessment years 2006-07, 2007-08, and order under sec.263 for the assessment year 2008-09.
2. Treatment of interest income earned from deposits made in trust and retention account under financing agreement as business income for deduction u/s.80IA.
3. Validity of invoking sec.263 to withdraw deduction given to the assessee regarding interest income from fixed deposits.

Analysis:
1. The appeals in ITA Nos.569 & 570/Mds/12 challenged orders of Commissioner of Income-tax(Appeals) for assessment years 2006-07 and 2007-08. The issue revolved around treating interest income earned from deposits in trust and retention account under financing agreement as business income for deduction u/s.80IA. The Commissioner rejected the claim based on the judgment of the Supreme Court in Pandian Chemicals Ltd. case, stating such receipts are not derived from the eligible undertaking for deduction. The appellant argued that the interest income was directly connected to the manufacturing activity and should be considered part of business profit. However, the Tribunal upheld the Commissioner's decision, citing various Supreme Court judgments on the interpretation of "derived from" in relation to business income.

2. The appellant contended that the interest earned from fixed deposits in trust account should be netted off against interest income of the trust, as the monies were held on behalf of lenders and not usable by the assessee. The Tribunal considered the direct nexus between profits and the industrial undertaking as per Supreme Court precedents. It concluded that interest earned from deposits under the financing agreement could not be classified as profits derived from the industrial undertaking. The Tribunal dismissed the appeal, stating that the interest paid and received did not share the same character, in line with Supreme Court rulings.

3. In ITA No.1188/Mds/2013, the appellant challenged the invocation of sec.263 to withdraw deduction given for interest income received from fixed deposits. The Tribunal upheld the Commissioner's decision, stating that the interest income should be considered as income from other sources, not business income. As the interest income was previously determined to be from other sources, the Tribunal found the order of the Assessing Officer justifiable under sec.263. Consequently, the appeals in ITA Nos.569, 570/Mds/2012 and 1188/Mds/2013 were dismissed, affirming the decision to treat the interest income as not eligible for deduction u/s.80IA.

This comprehensive analysis highlights the key arguments, legal interpretations, and conclusions drawn by the Tribunal in addressing the issues raised in the legal judgment.