2015 (2) TMI 506 - HC - Income Tax

Deduction u/s 80IC - Tribunal held that the interest income earned by the Appellant/Petitioner cannot be said to be derived by the eligible undertaking/units as required for claiming deduction - Held that - The said section 80IC postulates gross total income of an assessee shall include any profits and gains derived by an undertaking from any business referred to in sub-section(2)to be entitled to a deduction from such profits and gains as specified in sub-Section (3). Sub-section(2) applies to any undertaking which has begun or begins to manufacture or produce any article or thing. To our mind the facts of this case where the assessee has earned income from fixed deposits which deposits were profits and gains of the undertaking, the income obtained as interest on such profits and gains cannot be said to be derived from the business of manufacture or production of any article or thing by the assessee's undertaking.- Decided against the assessee. Deduction on account of scraps sale T&M Fee under Section 80IC allowed - expression derived by v/s Attributable To - Held that - To say that the scrap materials has no direct link or nexus with the industrial undertaking cannot be at all be expected or commend acceptance. For the sake of emphasis, we may say that the scrap materials come within the manufacturing process of the industrial undertaking in the manufacture of certain products such as V-Belts, oil seals, O-Rings and certain rubber moulded products, etc. Thus profits and gains from the sale of scrap materials is eligible to deduction in an amount equal to twenty per cent under S. 80HH, inasmuch as such gains or profits are derived from the industrial undertaking and includible in the gross total income of the assessee. See Fenner (India) Ltd. Versus CIT 1998 (4) TMI 67 - MADRAS High Court - Decided in favour of the assessee.

Summary

Issues Involved:
1. Interpretation of the word "derived" as used in Section 80-IC of the Income Tax Act, 1961.
2. Deductibility of interest income under Section 80-IC.
3. Deductibility of income from scrap sales under Section 80-IC.

Detailed Analysis:

1. Interpretation of the word "derived" as used in Section 80-IC:
The main issue revolves around the interpretation of the term "derived" within the context of Section 80-IC of the Income Tax Act, 1961. The court examined various judgments to understand the scope and meaning of "derived." The term was distinguished from "attributable to," which has a broader connotation. The court emphasized that "derived" implies a direct and immediate nexus with the business activity.

2. Deductibility of interest income under Section 80-IC:
The assessee argued that the interest income earned from fixed deposits should be considered as profits derived from the eligible undertaking, thereby qualifying for deductions under Section 80-IC. The court reviewed precedents including CIT vs. Meghalaya Steels Ltd. and CIT vs. Motorola India Electronics (P) Ltd., which supported the assessee's view. However, the court also considered contrary judgments such as Pandian Chemicals Ltd. vs. CIT, CIT vs. Globe Organics Ltd., and Fenner (India) Ltd. vs. CIT, which held that interest income does not have a direct nexus with the business of manufacturing or production and hence cannot be considered as derived from the undertaking.

The court concluded that interest income earned from fixed deposits, even if the deposits were profits and gains of the undertaking, cannot be said to be derived from the business of manufacturing or production. Thus, the question raised in the assessee's appeal was answered in the negative, favoring the revenue.

3. Deductibility of income from scrap sales under Section 80-IC:
The revenue contended that the income from scrap sales should not qualify for deduction under Section 80-IC. The court referred to the judgment in Fenner (India) Ltd. vs. CIT, which held that profits from the sale of scrap materials, being directly linked to the manufacturing process, are eligible for deduction. The court agreed with this reasoning, concluding that the income from scrap sales is derived from the industrial undertaking and qualifies for deduction under Section 80-IC.

Conclusion:
- The court dismissed the assessee's appeal regarding the deductibility of interest income, ruling in favor of the revenue.
- The court dismissed the revenue's appeal regarding the deductibility of income from scrap sales, ruling in favor of the assessee.

Both applications (GA No.1420 of 2014 and GA No.1735 of 2014) were disposed of, and the appeals (ITAT No.41 of 2014 and ITAT No. 59 of 2014) were dismissed. Urgent certified photocopies of the order were directed to be supplied to the parties upon compliance with requisite formalities.