2006 (2) TMI 92 - HC - Income Tax

Deduction under section 80-I - Industrial Undertaking - 1. What is the effect of dismissal of tax appeal by the High Court holding that no substantial question of law arises? 2. Whether Tribunal was justified in holding that while computing deduction under section 80-I of the Income-tax Act, 1961, interest received from trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking? no infirmity in tribunal s order

Issues Involved:
1. Effect of dismissal of tax appeal by the High Court holding that no substantial question of law arises.
2. Justification of the Income-tax Appellate Tribunal's decision to exclude interest received from trade debtors while computing deduction under section 80-I of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Effect of Dismissal of Tax Appeal by the High Court Holding that No Substantial Question of Law Arises
The primary question is whether the dismissal of an appeal by the High Court, stating that no substantial question of law arises, constitutes a decision on the merits and results in the merger of the Tribunal's order with the High Court's order.

Contentions:
- Appellant's Argument: An appeal is a continuation of the original proceedings, and when the High Court dismisses an appeal on the grounds that no substantial question of law arises, it endorses the Tribunal's decision. The Tribunal's order merges with the High Court's order, making the High Court's order the operative decision.
- Respondent's Argument: The High Court's dismissal on the ground of no substantial question of law does not constitute a decision on the merits. The High Court merely declines to entertain the appeal, and there is no merger of the Tribunal's order with the High Court's order.

Court's Reasoning:
- The High Court exercises appellate jurisdiction under section 260A of the Act when deciding whether a substantial question of law arises. This jurisdiction is not akin to the discretionary jurisdiction exercised by the Supreme Court under Article 136 of the Constitution.
- The doctrine of merger applies to appellate decisions, whether the appellate court reverses, modifies, or confirms the order under appeal. The High Court's dismissal of an appeal for lack of a substantial question of law is a decision on the merits, and the Tribunal's order merges with the High Court's order.
- The High Court's decision, even if it dismisses the appeal at the admission stage, constitutes a decision on the merits, affirming the Tribunal's order. The Tribunal cannot subsequently exercise rectification powers under section 254(2) of the Act on the same issue.

Conclusion:
The effect of the High Court dismissing a tax appeal on the ground that no substantial question of law arises is that the Tribunal's order on the issue merges with the High Court's order, making the High Court's decision the operative and enforceable decision.

Issue 2: Justification of Excluding Interest Received from Trade Debtors in Computing Deduction under Section 80-I
The question is whether interest received from trade debtors for late payment of sales consideration should be excluded from the profits of the industrial undertaking while computing the deduction under section 80-I of the Income-tax Act.

Contentions:
- Appellant's Argument: The interest received from trade debtors should be included in the profits derived from the industrial undertaking for the purpose of computing the deduction under section 80-I.
- Respondent's Argument: The interest received from trade debtors is not derived from the industrial undertaking but from the non-payment of sale consideration. Therefore, it should not be included in the profits for computing the deduction under section 80-I.

Court's Reasoning:
- The Tribunal relied on the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT, which held that the term "derived from" has a narrower meaning than "attributable to." The interest received from trade debtors is not derived from the industrial undertaking's manufacturing activity.
- However, the Court noted that the interest income is assessable under the head "Profits and gains of business," and it cannot be treated differently for computing the gross total income and the deduction under section 80-I.
- The Court referred to the Supreme Court's decision in CIT v. Govinda Choudhury and Sons, which held that interest received on delayed payments is attributable and incidental to the business carried on by the assessee and should be considered as business income.

Conclusion:
The Tribunal's decision to exclude interest received from trade debtors while computing the deduction under section 80-I is incorrect. The interest is part of the profits derived from the industrial undertaking and should be included in the computation for the deduction.

Final Judgment:
Both questions are answered in favor of the appellant. The appeal is allowed, and the Tribunal's order is set aside. The interest received from trade debtors should be included in the profits for computing the deduction under section 80-I of the Income-tax Act.

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