2005 (1) TMI 330 - AT - Income Tax

Deduction u/s 80-I - Profits And Gains From Industrial Undertaking - receipt of interest from trade creditor - Whether the amount of interest can be said to be derived from the business of running of industrial undertaking and if it has a direct nexus - difference of opinion between the Members of the Bench - Third member Order - Whether, the interest received from trade creditor on delayed payment and the transport subsidy received from the Government under Restructuring Transport Subsidy Scheme eligible for deduction u/s 80-IA of the Act? HELD THAT - In this case by running the industrial undertaking, the assessee produces goods which are marketed at a certain price tag. If the price is paid within the time by the purchaser, there is no dispute as the price so received is on account of the produce/commodity manufactured by running of industrial undertaking and later on sold. This price has a direct nexus with the running of industrial undertaking. The component of interest comes into operation when there is a breach of terms of payment. If there is no breach there is no interest meaning thereby that component of interest cannot be said to be loaded into the cost of product manufactured by the assessee's industrial undertaking. Such a payment cannot according to us take the colour of having been directly derived from the business of running of industrial undertaking. It may be as a necessary consequence running of business by the assessee or may be attributable to the business of assessee but cannot be said to be 'derived directly' from running of industrial undertaking by the assessee which is according to us the requirement of law. We, therefore, hold that the interest received by the assessee from its trade creditors on account of delayed payment has no direct nexus with the running of industrial undertaking by the assessee and is thus not eligible for the benefit of section 80-I of the Income-tax Act. Admittedly in the present case, the source of payment of interest is not industrial undertaking, but the delayed payment for the goods received and, therefore, following the judgment of the Apex Court in the case of Pandian Chemicals Ltd. v. CIT 2003 (4) TMI 3 - SUPREME COURT and the Madras High Court in the case of CIT v. Pandian Chemicals Ltd. 1997 (4) TMI 38 - MADRAS HIGH COURT , we feel that the assessee is not entitled to the benefit of section 80-I and, therefore, have no hesitation in rejecting one part of the Ground No. 1 which deals with the case of the assessee with regard to the payment of interest received from its sundry debtors. Receipt on account of transport subsidy - Respectfully following the judgment of the Apex Court, we feel that the amount of subsidy received cannot be said to be the income derived from industrial undertaking and, therefore, would not qualify for deduction u/s 80-IA. These two judgments were not taken into consideration by the Single Bench. That apart, one should have considered the request of the assessee regarding the referring of the issue to a Special Bench had there been conflicting views between the co-coordinating Benches. It is not the case here as the order in the case of Phatela Cotgin Industries is by a Single Bench. In this view of the matter, we have no option, but to reject the contentions raised by the assessee in this regard as well. In the result, the appeal filed by the Revenue is allowed. Per Keshaw Prasad, Accountant Member - I hold that the transport subsidy received from the Government was inextricably linked with the business carried on by the assessee as it will go to reduce the cost, the same will be eligible for deduction u/s 80-IA of the Act. The Assessing Officer is, directed to recalculate the deduction u/s 80-IA of the Act keeping in view the directions mentioned above. In the result, the appeal filed by the revenue is dismissed. THIRD MEMBER ORDER - So far as the interest received by the assessee on delayed payment is concerned, I hold that this arises directly out of the industrial undertaking and has, therefore, to be held eligible for the deduction u/s 80-IA. So far as the transport subsidy is concerned, a perusal of the orders of the Ld. Member shows that the receipt cannot be considered as income derived from the industrial undertaking. The transport subsidy is given by the Government in recoupment of the transport expenditure incurred by the assessee and at best it can only be said that a part of the expenditure has been reimbursed. It cannot be considered as income in the first instance. Certainly, it cannot be considered as income derived from the industrial undertaking. The immediate source of the income is the transport subsidy scheme and not the industrial undertaking. The judgment of the Supreme Court in the case of CIT v. Sterling Foods 1999 (4) TMI 1 - SUPREME COURT and Hindustan Lever Ltd. v. CIT 1997 (9) TMI 7 - SUPREME COURT clearly show that these transport subsidy cannot be stated to be derived from the industrial undertaking since the immediate source thereof is the transport scheme. A similar view has also been taken by the Delhi Bench of the Tribunal in the case of National Thermal Power Corpn. Ltd. v. Addl CIT 2004 (5) TMI 244 - ITAT DELHI-B . In the light of the judgments of the Supreme Court cited above, I am unable to give effect to the decision of the Chandigarh Bench of the Tribunal in ITO v. Kiran Enterprises 2004 (7) TMI 294 - ITAT CHANDIGARH-B . In the result, I hold that the interest received by the assessee from buyers on delayed payment is eligible for the deduction u/s 80-IA, but the transport subsidy received by the assessee is not eligible for the deduction. I answer the question, referred to me accordingly. The matter will now come before the regular Bench for being disposed of in conformity with my decision.

Summary

Issues Involved:
1. Eligibility of interest received from sundry debtors for deduction u/s 80-IA.
2. Eligibility of transport subsidy for deduction u/s 80-IA.

Summary:

Issue 1: Interest Received from Sundry Debtors

The primary contention was whether the interest received by the assessee from trade creditors on delayed payments qualifies for deduction u/s 80-IA of the Income-tax Act. The assessee argued that this interest is a trading receipt directly linked to its business activities, thus eligible for the deduction. The CIT(A) agreed, citing a direct nexus with the business activity. However, the Revenue, referencing the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, argued that the term "derived from" requires a direct nexus with the industrial undertaking, which the interest from delayed payments did not meet. The Tribunal concluded that the interest received lacks a direct nexus with the industrial undertaking and is therefore not eligible for deduction u/s 80-IA.

Issue 2: Transport Subsidy

The second issue was whether the transport subsidy received from the government qualifies as income derived from an industrial undertaking for deduction u/s 80-IA. The assessee contended that the subsidy is directly linked to the industrial unit's location in remote areas, thus qualifying for the deduction. The CIT(A) upheld this view. However, the Revenue disagreed, arguing that the subsidy is a promotional benefit and not directly derived from the industrial activity. The Tribunal, referencing the Supreme Court's decision in Pandian Chemicals Ltd., held that the subsidy does not qualify as income derived from the industrial undertaking and thus is not eligible for deduction u/s 80-IA.

Separate Judgment by Accountant Member:

The Accountant Member dissented, distinguishing the nature of interest income in the present case from that in Pandian Chemicals Ltd. He argued that the interest from delayed payments is directly linked to the business activity and should be eligible for deduction u/s 80-IA. Additionally, he held that the transport subsidy, being an incentive directly linked to the industrial unit's location, should also qualify for the deduction.

Third Member Decision:

The Third Member concluded that the interest received from buyers on delayed payments is eligible for deduction u/s 80-IA, but the transport subsidy is not. The immediate source of the subsidy is the transport scheme, not the industrial undertaking. This decision was based on the Supreme Court judgments in CIT v. Sterling Foods and Hindustan Lever Ltd. v. CIT.

Conclusion:

The appeal by the Revenue was allowed in part, denying the deduction for transport subsidy but allowing it for interest received from delayed payments.