2007 (9) TMI 223 - HC - Income Tax

Priority industry - Assessee is an industrial undertaking engaged in conversion of coal tar into hard pitch anthrance oil etc. being the priority industry - Tribunal was right in law in holding that the interest income on FDR with bank and on deposit with IDBI is part of the profits and gains derived from an industrial undertaking attracts section 80-I this interest has close nexus with the business of the assessee-company hence deduction allowable u/s 80 I

Issues Involved:
1. Whether the interest income on FDR with the bank and on deposit with IDBI is part of the profits and gains derived from an industrial undertaking attracting section 80-I of the Income-tax Act.
2. Whether the interest on FDR with the bank and on deposit with IDBI qualifies for deduction under section 80-I of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Interest Income as Part of Profits and Gains Derived from an Industrial Undertaking
The assessee, an industrial undertaking engaged in converting coal tar into hard pitch anthrance oil, claimed deductions under section 80-I of the Income-tax Act for the assessment years 1989-90 and 1990-91. The Assessing Officer allowed these deductions, including the interest earned on FDRs with the bank and deposits with IDBI. However, the Commissioner of Income-tax initiated revision proceedings under section 263, arguing that the interest income should not be considered as part of the profits and gains derived from the industrial undertaking. The Tribunal, after hearing both sides, held that the FDRs and IDBI deposits had a close nexus with the business of the assessee-company, thus qualifying the interest income as profits and gains of the industrial undertaking.

Issue 2: Qualification for Deduction under Section 80-I
The Tribunal's decision was based on the principle that the interest income generated from fixed deposits in the bank and IDBI had a direct nexus with the business of the assessee and was thus business income. The Tribunal referenced the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and the Bombay High Court's decision in CIT v. United Carbon India Ltd. [1991] 190 ITR 622, which supported the view that such interest income could be included in the profits and gains of the business for the purpose of deductions under section 80-I.

Legal Precedents and Interpretations:
1. Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC): The Supreme Court held that balancing charges arising from the sale of old machinery and buildings should be included in the business income for computing deductions under section 80E.
2. CIT v. Ahmedabad Electricity Co. Ltd. [1993] 203 ITR 521 (Bom): The Bombay High Court held that interest income from fixed deposits was attributable to the business of the assessee and qualified for relief under section 80-I.
3. CIT v. United Carbon India Ltd. [1991] 190 ITR 622 (Bom): The court held that interest income from short-term deposits of money not immediately required for business was attributable to the business and eligible for deduction under section 80-I.

Conclusion:
The High Court affirmed the Tribunal's decision, agreeing that the FDRs and IDBI deposits had a close nexus with the business of the assessee-company. Consequently, the interest income was considered part of the profits and gains derived from the industrial undertaking, qualifying for deductions under section 80-I. The court answered the questions of law in the affirmative, in favor of the assessee and against the Revenue.

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