2008 (2) TMI 425 - HC - Income Tax

Investment deposit account - Whether the interest earned by the appellant out of the deposits were excludible from the eligible profits for the purpose of deduction under section 32AB of the Act - Whether the Tribunal was justified in holding that the surplus out of the amount approved by the Government for meeting additional expenditure by the appellant would constitute the income in spite of the fact that the said amount was held in a fiduciary capacity by the appellant on behalf of the Government of Karnataka held that - Assessing Officer has failed to record any specific and categorical findings with regard to the facts of this case, the nature of the business activities being carried out by the assessee and the reason for its earning interest on certain deposits. The same have not been gone into in detail to record a finding if it would form part of business income or it would be income from other sources matter remanded.

Issues Involved:
1. Whether the interest earned by the appellant out of the deposits was excludible from the eligible profits for the purpose of deduction under section 32AB of the Income-tax Act, 1961.
2. Whether the surplus amount approved by the Government for meeting additional expenditure by the appellant constituted income despite being held in a fiduciary capacity by the appellant on behalf of the Government of Karnataka.

Detailed Analysis:

Issue 1: Interest Earned and Deduction under Section 32AB
The appellant, a Government-owned company engaged in manufacturing food products, cereals, and cattle feed, claimed a deduction under section 32AB of the Income-tax Act, 1961, amounting to Rs. 31,73,000. This included Rs. 12,73,552 as interest earned from deposits with the Karnataka Electricity Board and other short-term deposits made from surplus business funds. The Assessing Officer (AO) disallowed this interest income from being included in the eligible profits for quantifying the deduction under section 32AB, reasoning that it did not arise directly from the business activities of the assessee.

The Commissioner of Income-tax (Appeals) reversed this decision, treating the interest income as business income directly linked with the appellant's business activities. However, the Income-tax Appellate Tribunal (ITAT) quashed the Commissioner's order and restored the AO's decision, leading to the current appeal.

The appellant argued that the AO failed to specifically examine whether the interest income was directly related to the business activities. They contended that the Tribunal erroneously relied on CIT v. Dinjoye Tea Estate P. Ltd., which was not applicable as it did not consider the implications of section 32AB(3). The appellant cited judgments from the Madras High Court (Carborandum Universal Ltd. v. CIT) and the Calcutta High Court (Assam Brook Ltd. v. CIT) supporting their position.

Conversely, the respondent referenced a Full Bench judgment of the Kerala High Court (Parry Agro Industries Ltd. v. CIT), which held that only income forming profits and gains of business or profession should be considered for section 32AB deductions, excluding interest income.

Ultimately, the court found that the AO did not record specific findings regarding the nature of the business activities and the reason for earning interest on deposits. Thus, the matter was remitted to the AO to record a detailed finding on whether the interest income was part of the business income or income from other sources.

Issue 2: Surplus Amount and Fiduciary Capacity
The appellant collected Rs. 9,36,436 towards developmental/administrative expenses under an agreement involving the Union of India and US agency for International Development for importing yellow maize. The appellant, designated as a State-level agency, was to distribute maize and was allowed to charge Rs. 10 per bag from beneficiaries, with the Government of Karnataka's approval.

The AO included this surplus as income, rejecting the appellant's claim that it was held in a fiduciary capacity on behalf of the Government of Karnataka. The Commissioner of Income-tax (Appeals) sided with the appellant, stating the amount was held in a fiduciary capacity and should not be taxed. However, the ITAT reversed this decision, reinstating the AO's order.

The appellant argued that the AO did not record clear findings on whether the amounts collected were held in a fiduciary capacity. The court agreed, noting the absence of specific findings on this issue. Consequently, this matter was also remitted to the AO for a detailed examination and finding on whether the surplus amount was held in a fiduciary capacity for the State of Karnataka.

Conclusion:
The court refrained from answering the questions of law directly. Instead, it remitted both issues back to the AO for a detailed examination and recording of specific findings. The AO is directed to provide an opportunity for the assessee to prove its contentions and then pass an appropriate order in accordance with the law. The appeal was accordingly disposed of.

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