2018 (8) TMI 1729 - HC - Income Tax

Eligibility to deduction u/s 80IA - manufacturing of goods - Held that - In the instant case, the requirement of the Assessee to furnish the fixed deposit was a pre-condition to enable the Assessee to open a foreign Letter of Credit for the purpose of import of critical components for the manufacture of wind mill. This incidentally had earned some interest. As pointed out by the Hon ble Supreme Court in Shree Rama Multi Tech Limited 2018 (4) TMI 1374 - SUPREME COURT it is not the Assessee s surplus money, which was deposited by way of fixed deposit, which had earned interest; on the contrary, it was a pre-condition for the purchaser/Assessee to enable him to import the critical component for the purpose of manufacturing. Furthermore, it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of the Revenue that the amount, which was deposited in fixed deposit was a surplus money, which was lying idle in the hands of the Assessee. Therefore, whatever income accrued is merely incidental and not the prime purpose of doing the act in question, which resulted into accural of some additional income and therefore, the said income is not liable to be assesseed and is eligible to be claimed as deduction. We are of the clear view that the Assessee is entitled to deduction and the Tribunal erred in applying the decision of the Pandian Chemicals 2003 (4) TMI 3 - SUPREME COURT , which is distinguishable, for the reasons set out by us above.

Issues Involved:
1. Eligibility of interest income from margin money for deduction under Section 80IA of the Income Tax Act, 1961.
2. Applicability of the Supreme Court decision in Pandian Chemicals Limited v. CIT to the present case.
3. Interpretation of the terms "profits and gains derived from" under Section 80IA.

Detailed Analysis:

1. Eligibility of Interest Income for Deduction under Section 80IA:
The Assessee claimed deduction under Section 80IA for interest income earned on margin money deposited with the bank for obtaining a foreign Letter of Credit essential for importing components for manufacturing wind mills. The Tribunal disallowed the deduction, relying on the Supreme Court's decision in Pandian Chemicals Limited v. CIT, which held that interest income from deposits is not derived from the industrial undertaking. The High Court, however, distinguished this case, noting that the margin money was directly linked to the business activity (importing critical components), and thus, the interest income should be considered as derived from the business of the industrial undertaking.

2. Applicability of Pandian Chemicals Limited v. CIT:
The Tribunal applied the decision in Pandian Chemicals, where the interest on deposits with the Tamil Nadu Electricity Board was not considered as income derived from the industrial undertaking under Section 80HH. The High Court noted that Section 80IA has a broader scope compared to Section 80HH, emphasizing that the interest income in the present case was integrally connected to the business activity of the Assessee. The High Court concluded that the Tribunal erred in applying Pandian Chemicals, as the factual matrix and statutory provisions differ.

3. Interpretation of "Profits and Gains Derived From":
The High Court analyzed various judgments to interpret the term "profits and gains derived from." It emphasized that the income must have a direct nexus with the business activity of the industrial undertaking. The Court referred to decisions such as CIT v. Karnal Co-operative Sugar Mills Ltd. and CIT v. Bokaro Steel Limited, where interest earned on deposits made for business purposes was considered incidental to the business activity and thus eligible for deduction. The Court also noted that the term "derived from" is narrower than "attributable to," but in this case, the interest income was directly linked to the business of manufacturing wind mills.

Conclusion:
The High Court allowed the Assessee's appeal, setting aside the Tribunal's order. It held that the interest income earned on margin money deposited for obtaining a Letter of Credit, essential for importing components for manufacturing wind mills, qualifies for deduction under Section 80IA. The Court distinguished the decision in Pandian Chemicals and emphasized the broader scope of Section 80IA, concluding that the interest income was integrally connected to the business activity of the Assessee. The substantial question of law was answered in favor of the Assessee and against the Revenue.

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