2003 (4) TMI 3 - SC - Income Tax

Whether Tribunal was right in holding that the interest on deposits with Tamil Nadu Electricity Board should be treated as income derived by the industrial under taking for the purpose of section 80HH - HC was justified in answering the question in favour of department

Summary

Issues:
1. Interpretation of "income derived from" in section 80HH of the Income-tax Act, 1961.

Analysis:
The Supreme Court was tasked with determining whether the interest earned on deposits with the Tamil Nadu Electricity Board should be considered as income derived by the industrial undertaking for the purpose of section 80HH of the Income-tax Act. The appellant argued that since electricity was essential for the industrial undertaking and deposits were a pre-condition for its supply, the interest on the deposit should be treated as income derived from the industrial undertaking. However, the High Court rejected this argument based on the precedent set by Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, which defined the scope of "derived from" to have a narrower connotation than "attributable to."

The Supreme Court delved into the historical interpretation of the term "derived" in tax law, referencing the Privy Council's ruling in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 and a subsequent decision by a Constitution Bench in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1. The Court emphasized that income "derived from" an industrial undertaking must have a direct or immediate nexus with the business itself. While electricity was necessary for the industrial undertaking, the deposit with the Electricity Board was deemed a separate step from the core business activities, thus not directly flowing from the industrial undertaking.

The appellant's counsel attempted to argue for a liberal interpretation of section 80HH to fulfill the legislative intent behind its introduction. However, the Court held that in the absence of ambiguity in the statutory language, rules of interpretation cannot be applied. The Court affirmed the High Court's decision, dismissing the appeal without any order as to costs. The judgment reiterated that the word "derived from" in section 80HH must be strictly construed to maintain a direct connection with the industrial undertaking, as established by previous legal precedents and interpretations.

In conclusion, the Supreme Court's judgment clarified the interpretation of "income derived from" in the context of section 80HH of the Income-tax Act, emphasizing the need for a direct nexus between the income and the industrial undertaking. The decision upheld the High Court's ruling and rejected the appellant's argument regarding the treatment of interest on deposits with the Electricity Board as income derived from the industrial undertaking.