2008 (8) TMI 318 - HC - Income Tax

Interest Income from short term deposit of money and security deposit Deduction u/s 80HH and 80-I - The word derived is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition - assessee is not entitled to deduction on interest received on term deposit with M. P. E. B. for supply of high tension electricity.

Summary

Issues:
Interpretation of sections 80HH and 80-I for deduction on interest income from deposits.

Analysis:
1. The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the availability of deductions under sections 80HH and 80-I on interest received on short-term deposit of money, investment in IDBI, and security deposit with M. P. E. B. for supply of H. T. electricity.

2. The assessee, a public limited company engaged in manufacturing and selling telephone cables, claimed deductions under sections 80HH and 80-I on interest income. The Assessing Officer denied the benefits, stating that the interest income did not have a nexus with the industrial undertaking's activities.

3. The Commissioner of Income-tax (Appeals) treated the interest income as business income and allowed the deductions, excluding a specific amount. The Tribunal partially allowed the appeal, directing the Assessing Officer to allow deduction under section 80-I without reducing the deduction under section 80HH.

4. The High Court referred to precedents like Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, emphasizing that income to be considered "derived from" an industrial undertaking must have a direct or immediate nexus with the business. Interest income from deposits not directly related to the industrial activities was not eligible for deductions under sections 80HH and 80-I.

5. Despite the assessee's attempt to withdraw the reference, the High Court proceeded with the judgment due to opposition from the Revenue. The court ruled in favor of the Revenue, stating that the assessee was not entitled to deduction on interest received on term deposits with M. P. E. B. for the supply of high tension electricity.

This detailed analysis covers the interpretation of sections 80HH and 80-I in the context of interest income from various deposits, the Assessing Officer's denial of benefits, the Commissioner of Income-tax (Appeals) and Tribunal's decisions, relevant legal precedents, and the final judgment of the High Court in favor of the Revenue.