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2004 (6) TMI 259 - AT - Income TaxDeduction u/s 80-IA - interest income was earned from deposits - miscellaneous income from sale of empty drums/containers and useless materials - profits and gains derived from an industrial undertaking - HELD THAT - From the record we find that for the purpose of business of its industrial undertaking, the assessee had entered into an agreement with M/s. Dabur India Ltd. according to which Dabur is to get its products manufactured by the assessee company under the technical know-how and in the trade name of Dabur. The Dabur India Ltd. was to arrange necessary business and bank guarantee for the assessee company for the manufacture and sale of products on the terms and conditions as provided in the agreement. As per the terms and conditions of the agreement, the technology, material procurement, quality control including selection of machinery etc. shall be as per the approval of M/s. Dabur India Ltd. only. M/s. Dabur India Ltd. had organised term loan and working capital from the bankers and its associate concerns and also extended corporate guarantee to the respective bankers for extending financial assistance to the assessee company. The deposits given by the assessee out of business compulsion and the interest earned thereon even though not derived from industrial undertaking but was having direct and proximate connection with the business of industrial undertaking of the assessee, the assessee was therefore eligible for deduction u/s 80-IA on the interest earning. There is no dispute to the fact that after deducting interest received from the interest paid, there was debit balance of the interest. With regard to the proposition of netting off the interest, as per our considered view when profit is determined under the head 'Profits and gains of business or profession', what are included in it are the net receipts/payments of the various components that go to make the profit under that head. Thus, if the profits of business include certain receipts which have corresponding costs, or if the profits include certain credits and the business has also debits of the same nature, if these are not netted out against each other, the profit of business will present a distorted picture and may lead to injustice while implementing an incentive provision. In the instant case, the said interest earning has merely gone to reduce the net interest burden of the assessee company. Thus, in effect, there is no income on account of interest included in the profits of the business of industrial undertaking, so no reduction whatsoever is called for while computing deduction u/s 80-IA. While computing profit of the business of industrial undertaking u/s 80-IA, revenue receipts can be adjusted against revenue expenditure of the like nature. Revenue receipt in the form of interest went to reduce the revenue expenditure of interest, because funds were borrowed for the purpose of business of industrial undertaking and funds were kept in deposit for the purpose of business of the assessee's industrial undertaking. Thus, interest income or expenditure is inextricably linked and is having direct and proximate connection with the business of industrial undertaking. In the instant case, in all the years under consideration, the expenditure of interest is higher than the interest income, no interest income augmented the profit of business of industrial undertaking which needs to be reduced for computing deduction in respect of business of industrial undertaking. There is also no dispute to the fact that the assessee company was having only source of income from the business of this industrial undertaking. Miscellaneous income arising from sale of empty drums/containers, sale of useless materials, we find that all the sale proceeds were only out of the business of industrial undertaking of the assessee. Therefore, even for determining the profits and gains 'derived from any business of industrial undertaking', manufacturing or producing any article or thing include sale proceeds of such article or thing of scrap generated during the course of such manufacturing activity. It is not possible to close eyes to the event which amounts to increase the sale consideration. After all what is to be determined is the profits and gains of business of industrial undertaking and there is no warrant to stop for the above purpose at sales of main products only. The controversy here is not when manufacturing activity of the assessee was over, but what was the profit and gains of the business of the industrial undertaking and how was it to be determined. For determining the above profits of business of industrial undertaking it is not possible to ignore sale of empty drums/containers, sale of useless materials which is closely and directly connected with and outcome of the manufacturing process itself. Thus, we find that there is a direct nexus between the sale of these items and carrying on of business of industrial undertaking. In the result, all the appeals of the Revenue are dismissed.
Issues Involved:
1. Deduction u/s 80-IA for interest income. 2. Deduction u/s 80-IA for miscellaneous income from sale of empty drums/containers and useless materials. Summary: Issue 1: Deduction u/s 80-IA for Interest Income The Revenue's grievance was against the CIT (Appeals)'s direction to the Assessing Officer to recompute the deduction u/s 80-IA. The Assessing Officer had denied the deduction for interest income, asserting that u/s 80-IA, deductions are allowed only for profits and gains derived from an industrial undertaking. The CIT (Appeals) observed that the interest income was earned from deposits made with M/s. Dabur India Ltd. and its associates, which were a business compulsion and had a direct nexus with the business of the industrial undertaking. The Tribunal noted that the term "profits and gains derived from any business of Industrial Undertaking" in section 80-IA is broader than the term used in section 80-I, thus allowing deductions for income closely related to the business of the industrial undertaking. The Tribunal upheld the CIT (Appeals)'s decision, stating that the interest income, though not directly derived from the industrial undertaking, had a direct and proximate connection with the business, making it eligible for deduction u/s 80-IA. Additionally, the Tribunal supported the principle of netting off interest income against interest expenditure, as the interest paid was higher than the interest received, resulting in no net interest income. Issue 2: Deduction u/s 80-IA for Miscellaneous Income The CIT (Appeals) had allowed the deduction u/s 80-IA for miscellaneous income arising from the sale of empty drums/containers and useless materials, considering it an integral part of the business of the industrial undertaking. The Tribunal agreed, noting that such income is directly connected with and an outcome of the manufacturing process. Therefore, the sale proceeds of these items should be included in determining the profits and gains derived from the business of the industrial undertaking. Conclusion: The Tribunal dismissed all the appeals of the Revenue, upholding the CIT (Appeals)'s orders for the assessment years 1995-96 to 1998-99.
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