2010 (4) TMI 229 - HC - Income Tax

Industrial Undertaking- The Assessing Officer held that the interest realized by the assessee on the amount of Rs. 4 36 372 on account of unsecured loans advanced by the assessee could not be held to constitute profits and gains derived from the industrial undertaking. The assessee was found to have parked funds with a specific aim of earning interest thereon and it was consequently held that the interest received as such had no direct link with the profits and gains derived from the industrial undertaking. The Commissioner (Appeals) held that the interest received as such had no direct link with the profits and gains derived from the industrial undertaking. The Commissioner (Appeals) held that the interest income of Rs. 4, 36, 372 could not be reduced from the business income while computing the Income u/s 80-IB. The Tribunal confirmed the view of Commissioner (Appeals). Held that- for the purpose of deduction u/s 80-IB the interest income received on unsecured loans did not for part of business income.

Summary

Issues:
1. Whether interest income from bill discounting can be considered as derived from manufacturing for deduction under section 80-IB?
2. Whether interest income from unsecured loans can be deducted from business income for computation of deduction under section 80-IB?

Analysis:

Question No. 1:
The first issue revolves around the deduction under section 80-IB concerning interest income from bill discounting. The assessee, engaged in manufacturing, claimed deduction under section 80-IB for interest income received on delayed payments. The Assessing Officer contended that this interest income was not derived from the industrial undertaking. However, the Commissioner (Appeals) and the Tribunal disagreed, citing the explanation provided by the assessee. The court analyzed that the interest income was essentially a component of the sale price for goods sold, thus forming part of profits derived from the eligible business. Referring to the narrower interpretation of "derived from" by the Supreme Court, the court concluded that the interest income satisfied the first-degree test and should be allowed as a deduction under section 80-IB. Therefore, the first question was answered against the Revenue and in favor of the assessee.

Question No. 2:
The second issue pertains to interest income from unsecured loans for deduction under section 80-IB. The Assessing Officer argued that this interest income was not derived from the industrial undertaking. The Commissioner (Appeals), however, held that the interest income should not be reduced from business income for computing the deduction under section 80-IB. The court disagreed with the Commissioner (Appeals) and held that the interest income from unsecured loans did not meet the first-degree test as laid down by the Supreme Court. The court clarified that the interest income received on unsecured loans should not be considered as part of the business income for the purpose of deduction under section 80-IB. Consequently, the second question was answered in favor of the Revenue and against the assessee.

In conclusion, the court allowed the appeal on the first question regarding interest income from bill discounting but ruled in favor of the Revenue on the second question concerning interest income from unsecured loans. The court clarified that interest income from unsecured loans does not form part of the business income for the purpose of deduction under section 80-IB.