2022 (9) TMI 1383 - HC - Income Tax

Deduction u/s 80(I) - scope of the word derived and the word industrial undertaking - applicability of the words derived from an industrial undertaking as mentioned u/s 80(I) - whether the interest paid on delayed payments form part of profits and gains derived from an industrial undertaking? - HELD THAT - Section 80HH of the I.T. Act, which deals with deductions in respect of the profits and gains from newly established industrial undertakings or Hotel business in backward areas also contains the phrase profits and gains derived from an industrial undertaking. The word derived has been construed by the Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh 1948 (7) TMI 1 - PRIVY COUNCIL Hon ble Supreme Court in Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT observed that the word derived from in Section 80-HH must be understood as something which has direct or immediate nexus with the appellant s industrial undertaking. The fact situation in the case on hand also relates to payment of interest on delayed payments of sale proceeds to the assessee. As observed in the Gujarat High Court that there are two methods of realizing sale consideration, the object being to realise sale proceeds at the earliest and without delay. To avoid any loss to the assessee on account of the delayed payments, for the goods supplied, two contingencies can be stipulated (1) charging little higher rate or (2) collecting interest on delayed payments. By this, the transaction would not be incidental or different. In our view, it forms part of the same transaction as the amount due for the goods sold is being paid with some delay for which an interest is being collected. Applying the ratio laid down in the above judgments to the case on hand, it is clear that there is direct nexus between the interest received, goods sold and the payments made including interest for the goods sold. Hence, it can be said that the profits and gains derived was from the business of the assessee and accordingly the interest received on delayed payments for the goods supplied/sold would be entitled to relief of exemption u/s 80(I) of the I.T. Act. Appeal allowed.

Issues Involved:
1. Applicability of the words "derived from an industrial undertaking" under Section 80(I) of the Income Tax Act, 1961.
2. Entitlement of the assessee for deduction under Section 80(I) in respect of interest received on delayed payment by customers.

Detailed Analysis:

1. Applicability of the words "derived from an industrial undertaking" under Section 80(I) of the Income Tax Act, 1961:
The core issue in this appeal revolves around the interpretation of the phrase "derived from an industrial undertaking" as mentioned in Section 80(I) of the Income Tax Act, 1961. The appellant, engaged in the manufacture and production of rice bran oil and other oils, claimed a deduction under Section 80(I) for the interest received from debtors due to delayed payment of sale proceeds. The Assistant Commissioner of Income Tax restricted this deduction, arguing that the interest was not derived from the business of the industrial undertaking.

The Commissioner of Appeals partially allowed the appeal, but the Income Tax Appellate Tribunal (ITAT) was divided. The Judicial Member sided with the assessee, while the Accountant Member disagreed, leading to a referral to a Third Member. The Third Member concurred with the Accountant Member, holding that the interest receivable from debtors on delayed payments does not qualify as income derived from the business of the industrial undertaking, referencing the Nirma Industries vs. ACIT case.

2. Entitlement of the assessee for deduction under Section 80(I) in respect of interest received on delayed payment by customers:
The appellant argued that the Tribunal erred in its conclusion, citing the judgments of the Madras High Court in Commissioner of Income Tax vs. Madras Motors Limited and the Gujarat High Court in Nirma Industries Limited vs. Deputy Commissioner of Income Tax. The appellant contended that the interest earned from delayed payments should be considered as income derived from the industrial undertaking. The respondent, however, relied on the Supreme Court judgments in Pandian Chemicals Ltd. vs. CIT and Commissioner of Income Tax vs. Sterling Food, Mangalore, arguing that the interest on delayed payments does not form part of the same transaction as the sale proceeds and thus cannot be considered as derived from the industrial undertaking.

The High Court's analysis focused on the interpretation of the word "derived" and its application in similar contexts. Citing the Privy Council's definition in CIT vs. Raja Bahadur Kamakhaya Narayan Singh and the Supreme Court's approval in Bacha F. Guzdar vs. CIT, the court emphasized that the word "derived" implies a direct or immediate nexus with the industrial undertaking. The court also referenced the Sterling Food case, which required a direct nexus between profits and gains and the industrial undertaking for the application of the words "derived from."

The court noted that in Pandian Chemicals, the interest from deposits made for electricity connections was not considered derived from the industrial undertaking, as the nexus was not direct. However, the interest in the present case was directly related to the business activity of selling goods, making it different from the Pandian Chemicals scenario.

Further, the court considered judgments from the Gujarat High Court in Nirma Industries and the Madras High Court in Madras Motors, which supported the appellant's view that interest on delayed payments is directly relatable to the business activity and thus qualifies for deduction under Section 80(I).

Conclusion:
The High Court concluded that there is a direct nexus between the interest received on delayed payments and the business activity of the industrial undertaking. Therefore, the interest qualifies as profits and gains derived from the industrial undertaking, entitling the assessee to the deduction under Section 80(I) of the Income Tax Act. The appeal was allowed, and the court ruled in favor of the appellant, granting the claimed deduction.

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