2009 (11) TMI 638 - HC - Income Tax

Deduction under section 80-IA - whether assessee is entitled to deduction under section 80-IA of the Income-tax Act, 1961, on interest received from trade debtors and also on interest earned on FDRs - Held that - interest received from the trade debtors would be entitled to deduction under section 80-IA, but interest earned on FDRs would not be so entitled in view of the judgment in Shri Ram Honda Power Equip (2007 - TMI - 2891 - HIGH COURT, DELHI) Whether assessee is entitled to deduction under section 80-IA of the Income-tax Act, 1961, on the amount of the duty drawback and on the amount received by the assessee on sale of the DEPB and the QBAL licences - incomes would constitute independent source of income beyond the first degree nexus between profits of the industrial undertaking and, therefore, were not to be treated as profits derived from the business of the industrial undertaking eligible for deduction under section 80-IB of the Act - Held that - Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act, questions are answered in favour of the Revenue Liberty India (2009 - TMI - 34471 - SUPREME COURT) Whether the Tribunal was correct in law in allowing deduction to the assessee under section 80-IA of the Income-tax Act, 1961, on the amount of notional credit of customs duty on goods imported for self-consumption - questions are answered in favour of the Revenue Liberty India (2009 - TMI - 34471 - SUPREME COURT)

Issues Involved:
1. Eligibility for deduction under section 80-IA of the Income-tax Act, 1961, on interest earned from late payments by customers.
2. Deduction under section 80-IA on interest earned on Fixed Deposit Receipts (FDRs).
3. Deduction under section 80-IA on duty drawback and amounts received on sale of DEPB and QBAL licenses.
4. Deduction under section 80-IA on notional credit of customs duty on goods imported for self-consumption.
5. Reduction of interest paid against interest received while calculating deduction under section 80HHC read with Explanation (baa) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80-IA on Interest Earned from Late Payments by Customers:
The primary issue was whether the interest earned by the assessee on late payments received from customers qualifies for deduction under section 80-IA of the Income-tax Act, 1961. The Tribunal held in favor of the assessee, treating the interest as business income. The High Court referred to the Supreme Court's judgment in Liberty India v. CIT [2009] 317 ITR 218 (SC), which clarified that deductions under sections 80-I, 80-IA, and 80-IB are restricted to profits derived directly from the industrial undertaking. The High Court agreed with the Tribunal, citing the Gujarat High Court's decision in Nirma Industries Ltd. v. Deputy CIT [2006] 283 ITR 402 (Guj), which treated interest on overdue payments as part of the higher sale price, thus deriving from the business of the industrial undertaking. Consequently, the High Court affirmed that interest on overdue payments qualifies for deduction under section 80-IA.

2. Deduction under Section 80-IA on Interest Earned on FDRs:
The High Court addressed this issue in several appeals, consistently ruling that interest earned on FDRs does not qualify for deduction under section 80-IA. This decision was based on the precedent set by CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), which distinguished between interest income from business operations and interest income from other sources. The court concluded that interest on FDRs is not derived from the industrial undertaking and thus is not eligible for section 80-IA deductions.

3. Deduction under Section 80-IA on Duty Drawback and Amounts Received on Sale of DEPB and QBAL Licenses:
The High Court referred to the Supreme Court's judgment in Liberty India [2009] 317 ITR 218 (SC), which held that income from DEPB and duty drawback schemes constitutes an independent source of income and is not derived from the industrial undertaking. Therefore, the High Court ruled that such income does not qualify for deduction under section 80-IA, consistently deciding this issue in favor of the Revenue across multiple appeals.

4. Deduction under Section 80-IA on Notional Credit of Customs Duty on Goods Imported for Self-Consumption:
Following the same rationale as in the Liberty India case, the High Court concluded that the notional credit of customs duty on goods imported for self-consumption does not derive from the industrial undertaking. Consequently, this income is not eligible for deduction under section 80-IA, ruling in favor of the Revenue.

5. Reduction of Interest Paid Against Interest Received While Calculating Deduction under Section 80HHC Read with Explanation (baa):
The High Court addressed this issue in appeals I.T.A. No. 545 of 2006 and I.T.A. No. 18 of 2007, ruling in favor of the Revenue. The court relied on the judgment in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), which clarified that interest income should not be reduced by interest paid when calculating deductions under section 80HHC. This decision was consistently applied across the relevant appeals.

Conclusion:
The High Court's judgments consistently applied the principles established by the Supreme Court in Liberty India and other relevant cases. The court ruled in favor of the assessee regarding interest on overdue payments from customers, treating it as business income eligible for section 80-IA deductions. However, the court ruled in favor of the Revenue on issues related to interest on FDRs, duty drawback, DEPB and QBAL licenses, notional customs duty credit, and the reduction of interest paid against interest received under section 80HHC.

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