2003 (4) TMI 220 - AT - Income Tax

Issues Involved:
1. Interest recovered from debtors for late payment of the sale price.
2. Interest from bank deposits pledged for obtaining LC and bank guarantee.
3. Interest from IDBI on deposits required u/s 32AB of the Act.
4. Interest from sarafi and bank on deposits out of initial/surplus funds.
5. Insurance claim receipts for reimbursement of losses.
6. Sale of scrap, spare parts, sale of raw material & misc. receipts.

Summary of Judgment:

1. Interest recovered from debtors for late payment of the sale price:
Interest is considered compensation for the use or retention of money owed. It is not a consideration of the sale of goods from the industrial undertaking, even though it originates from the sale. The immediate source is the debt owed, making it a degree away from the industrial undertaking. The Privy Council in Raja Bahadur Kamakhaya Narayan Singh's case held that the immediate and effective source is the debt itself. Therefore, interest on late payment is not derived from the industrial undertaking.

2. Interest from bank deposits pledged for obtaining LC and bank guarantee:
Interest earned on bank deposits used as security for letters of credit or bank guarantees is derived from the deposit itself. Although the deposit has a commercial connection with the industrial undertaking, it is not an industrial undertaking by itself. The effective source of interest income is the deposit, making the industrial undertaking a source two degrees away. Hence, such interest is not derived from the industrial undertaking.

3. Interest from IDBI on deposits required u/s 32AB of the Act:
Interest earned on deposits with IDBI, made to avail benefits u/s 32AB, is derived from the deposit under a scheme. The deposit is made after and out of profits earned from the undertaking, making it a step away from the industrial undertaking. Therefore, such interest is attributable to the business of the undertaking but not derived from it.

4. Interest from sarafi and bank on deposits out of initial/surplus funds:
Interest earned on surplus funds, whether initial or generated from within the earnings of the undertaking, is derived from the deposits made and not directly from the industrial undertaking. The distinction between initial and surplus funds may be valid for determining business income but not for income derived from the industrial undertaking.

5. Insurance claim receipts for reimbursement of losses:
Insurance receipts are generally not considered income but compensation for losses incurred. Such receipts are deemed income by virtue of section 41(1) only as business income and not as income derived from the industrial undertaking. Therefore, insurance claim receipts are not eligible for deductions under sections 80HH, 80HHA, 80-I, and 80-IA.

6. Sale of scrap, spare parts, sale of raw material & misc. receipts:
- Sale of scrap generated during the manufacturing process is considered income derived from the industrial undertaking.
- Sale of spare parts and raw materials, if part of 'after sale service' or own manufactured spare parts, is derived from the industrial undertaking.
- Independent trading activities not conditioned to sale or manufacture are not considered income derived from the industrial undertaking.

Individual Cases:

1. Meera Industries (ITA No. 4985/Ahd./1996):
- Entitled to deduction u/s 80-I on sale of spare parts and rewinding charges.
- Not entitled to deduction on interest from late payment of sale proceeds.
- Disallowance of interest on partners' capital account deleted.

2. Amarsinhji Stationery Industries (ITA No. 886/Ahd./1996):
- Entitled to deduction u/s 80-I on sale of scrap and labour charges.
- Not entitled to deduction on bank interest, interest on late payment, and insurance claim receipts.
- Other issues not pressed.

3. Sundek India Ltd. (ITA No. 1460/Ahd./2002):
- Not entitled to deduction u/s 80HH and 80-I on interest from bank deposits for letters of credit and bank guarantees.

4. Suncity Synthetics Ltd. (ITA No. 480/Ahd./1996):
- Not entitled to deduction u/s 80-I on bank interest and interest on late payment.
- Relief granted for labour charges and section 80HHA deduction as Small Scale Industry.

5. Suncity Synthetics Ltd. (ITA No. 230/Ahd./1998):
- Not entitled to deduction u/s 80-I on trading sales, bank interest, and interest on short-term loans.
- Relief granted for commission receipts on purchase of raw material and section 80HHA deduction as Small Scale Industry.

6. Pee Gee Fabrics (P.) Ltd. (ITA No. 4850/Ahd./1996):
- Not entitled to deduction u/s 80-IA on

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