2007 (11) TMI 299 - HC - Income Tax

Industrial undertakings exemption under section 80I duty drawback and interest - While completing the assessment the Assessing Officer has restricted the claim of deduction under section 80-I by disallowing the claim of duty drawback as well as interest on bank deposit held that appellant is not entitled for deduction under section 80-I in respect of duty drawback - on the admitted fact that the deposits were made out of profit income for the purpose of availing of further facilities from the bank we do not find any error in the order of the Tribunal holding that interest income would not qualify for deduction under section 80-I it being linked for better business prospects and there is no nexus between export earnings and interest income

Summary

Issues:
1. Entitlement to deduction under section 80-I in respect of duty drawback.
2. Entitlement to deduction under section 80-I in respect of interest earned on amounts retained by the bank.

Entitlement to deduction under section 80-I in respect of duty drawback:
The appellant, engaged in the business of shoe uppers, filed an appeal against the Income-tax Appellate Tribunal's order disallowing the claim of deduction under section 80-I for duty drawback and interest on bank deposit. The Tribunal rejected the claim stating that duty entitlement and interest do not qualify as "income earned out of industrial activity." The Tribunal referred to the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT, emphasizing the need for income to be connected with the industrial undertaking for deduction under section 80-I. The appellant relied on the Gujarat High Court's decision in CIT v. India Gelatine and Chemicals Ltd., arguing that duty drawback is "derived from" the industrial undertaking and should be eligible for deduction. However, the court cited previous judgments emphasizing that profits eligible for deduction under section 80-I must be directly derived from the industrial undertaking itself. The court concluded that duty drawback and interest income did not have a direct nexus with the industrial activity, thus not qualifying for deduction under section 80-I.

Entitlement to deduction under section 80-I in respect of interest earned on amounts retained by the bank:
Regarding the interest earned on amounts retained by the bank, the appellant attempted to demonstrate a link to industrial activity through bank deposits. However, the court found that while the deposits were related to industrial profits, the interest earned did not directly stem from the industrial activity but was kept for future banking facilities. Citing Dollar Apparels v. ITO and other cases, the court held that interest income on deposits without a direct connection to export earnings or industrial activity does not qualify for deduction under section 80-I. The court emphasized the necessity for a clear nexus between the income and the industrial undertaking for eligibility under section 80-I. Consequently, the court dismissed the appeal, affirming the Tribunal's decision that interest income on bank deposits did not meet the criteria for deduction under section 80-I due to the lack of a direct link with industrial activity.

In conclusion, the High Court of Madras dismissed the appeal, upholding the Income-tax Appellate Tribunal's decision regarding the ineligibility of the appellant for deductions under section 80-I for duty drawback and interest earned on bank deposits. The court emphasized the requirement for income to be directly derived from the industrial undertaking to qualify for deductions under section 80-I, highlighting the importance of a clear nexus between the income and the industrial activity for eligibility.