9911796707
TMI Blog2001 (4) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 80-I. It was contended before the learned CIT (Appeals) that the Assessing Officer had not considered interest on FDRs amounting to Rs.76,931 and Rs.1,69,114 while working out the deduction under the said section. It was also contended that there was no dispute that the interest was part of business income. It was explained to the first appellate authority that the assessee-company asked for deposits varying from 20 per cent to 30 per cent against the orders booked by the costumers. For the safety of the deposits the customers concerned asked for the bank guarantee which the assessee-company provided through its cash credit facility with the bank. It was further explained that the bank in turn requested for the security in respect thereof to the extent of 25 per cent of the guarantee allowed by the bank. It was further explained that when the customers made the payments against the supplies received to the extent of 90 per cent of the value thereof retaining the balance of 10 per cent against performance guarantee. This 10 per cent was released by the customers again against bank guarantees provided by the bank against the FDRs taken by the assessee in its fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgments and there was no merit in the appeal of the revenue for not allowing deduction on the interest earned. 7. We have considered the rival submissions in the light of material placed before us and precedents relied upon. The only question which falls for our consideration is whether the assessee is entitled to deduction under section 80-I on account of interest earned on FDRs, made primarily during the course of business. 8. In order to understand the controversy in hand, it may be relevant to reproduce provisions of section 80-I(1):-- "80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel for the business of repairs to ocean-going vessels or other powered craft, to which this section applied, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof....." The bare perusal of this section brings to light that only the profits and gains derived from industrial undertaking are entitled to deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct of the business of generation and distribution of electricity." From the above legal position it is clear that in order to be covered under section 80-I, it is necessary that the income should have direct nexus with the industrial undertaking. The assessee-company is engaged in the manufacture and sale of tube-mill plant equipments. The interest earned on FDRs in the instant case can be termed as 'attributable to' the industrial undertaking, but not 'derived from' it. Under these circumstances we are of the view that the interest can't qualify to be included for the purposes of calculating deduction under section 80-I. Our view is further fortified by the judgment of the Madras High Court in the case of Fenner (India) Ltd. v. CIT (No. 2) [2000] 241 ITR 803 (Mad.), where it was held, in the context of section 80HH, that the interest earned by the industrial undertaking cannot at all be eligible to be included in the gross total income for claiming deduction of an amount equal to twenty per cent in the process of computation of the profits and gains of the said industrial undertaking. We are therefore of the considered view that the CIT (Appeals) did not appreciate the positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record and considering the contention of the learned counsel of the assessee, was of the view that the interest on FDRs was earned in the course of carrying on the business. This view was taken by the CIT(Appeals) after considering the explanation of the counsel of the assessee that the assessee-company asked for deposits varying from 20 per cent to 30 per cent against the orders booked by the customers. For the safety of the deposits and customers concerned asked for the bank guarantee which the assessee-company provided through its cash credit facility with the bank. It was further explained that the bank in turn requested for the security in respect thereof to the extent of 25 per cent of the guarantee allowed by the bank. It was further explained that when the customers made the payment against the supplies received to the extent of 90 per cent of the value thereof, retaining the balance of 10 per cent against performance guarantee. This 10 per cent was released by the customers again against bank guarantee provided by the bank against the FDRs taken by the assessee in its favour. It was thus pointed out that two types of FDRs had to be provided to the bank on which interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal by Tribunal, the learned counsel has placed reliance on the following decisions:-- (1) Rajasthan Petro Synthetics Ltd.; (2) Dunlop India Ltd.; (3) SouthIndiaShipping Corpn. Ltd.; (4) Paramount Premises (P.) Ltd. and (5) Cocanada Radhaswami Bank Ltd. These decisions were not considered by my learned brother because of the latest decision of theApex Courtin case of Sterling Foods. 6. Though the word in section 80-I is "derived from" but this word has to be considered with wider sense. FDRs were taken by the assessee as per pre-condition of the bank which was for getting cash credit facility and other security for the purpose of safety of the deposits of the customers. Therefore, there is a direct nexus of the interest income earned by the assessee on FDRs with the activities of industrial undertaking of the assessee. The FDRs were not taken from the surplus funds, but they were taken from the funds borrowed for the business purposes. The assessee has claimed the deduction of the expenses on account of interest paid on borrowed funds which was at Rs.6.56 lakhs. If the analogy is applied that the earned interest income was not income of the industrial undertaking, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was not sale of import entitlements, as Government of India does not grant any import entitlement for the purpose of sale. It is always granted by the Central Government to encourage the exporter to make more exports. Therefore, the facts of the case of Sterling Foods are distinguishable, as facts in the instant case is in regard to netting of two interests which was for the purpose of business activity. Therefore, in my considered view, the ratio of the decision in the case of Sterling Foods is not applicable on the facts of the present case. 8. I have also seen the decision in the case of Fenner India Ltd. In this case also the deduction was under section 80HH, which was claimed on interest received on securities given to Electricity Board. This decision by the Madras High Court was rendered after following the decision in the case of CITv. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad.). No facts were given in the case of Fenner (India) Ltd. as simply the decision in case of Pandian Chemicals Ltd. was followed. I have seen the facts in the case of Pandian Chemicals Ltd. The facts were that assessee preferred security to the Electricity Board as the same was conditional fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant commenced manufacturing Ashok Leyland trucks in collaboration with a foreign company, Leyland from 1966 onwards; that there was a phased programme for the manufacture of necessary spare parts; that some of the purchasers of the trucks found is difficult during some years to get the requisite spare parts, either because the spare parts manufactured by the appellant were not sufficient to meet the demand or because the appellant did not manufacture these particular spare parts; that in the said circumstances and as a matter of commercial expediency, the appellant imported such spare parts and sold them during the accounting years relevant to the assessment years in question. The Tribunal, therefore, held in favour of the appellant. On a reference the High Court held against the appellant for the assessment years in question. On appeal to the Hon'ble Supreme Court, the Supreme Court reversed the decision of the High Court that the industry being carried on by the appellant was admitted a priority industry as defined in section 80B(7) of the Act. Reading the relevant portion of sub-section (1) of section 80-I alongwith the definition of "priority industry" in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 80-I". 13. In the case of South India Shipping Corpn. Ltd, it was held that there was a nexus between shipping business of the assessee-company and the interest accrued on theLondonbroker's business activity. Accordingly the income derived by way of interest from theLondonbrokers of the assessee-company was entitled to the benefit under section 80J. 14. After perusing the ratio of these decisions I found that the ratio of these decisions are helping the assessee as the facts are similar in those cases. Therefore also I am of the view that the assessee is entitled to deduction under section 80-I on the interest earned on FDRs. 15. Recently, 'D' Bench of the Income-tax Appellate Tribunal,Delhihas decided the issue in regard to deduction under section 80-I on account of interest earned by the assessee. This decision was rendered in the case of Honda Seil Power Products Ltd. v. Dy. CIT [IT Appeal No. 2404 (Delhi) of 1999] for assessment year 1995-96, decided on24th March, 2000. In this case the assessment under section 143(3) was completed. On a later stage proceedings under section 263 of the Income-tax Act were initiated and in the order under section 263, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onda Seil Power Products Ltd. The Tribunal also considered the ratio in the case of Snam Progetti S.P.A. v. Addl. CIT[1981] 132 ITR 70. In this case the Hon'ble Delhi High Court has held that the assessee had not come from Italy to make bank deposits in India, but had come to carry on the business and the income earned by it by depositing funds in the bank and earning interest thereon would also be business income and for the purpose of set off, it could not be treated as separate from business income. These ratios are also applicable on the facts of the present case. Therefore, in view of these decisions and in view of other reasons discussed by me above, I am of the view that assessee is entitled to deduction under section 80-1 of the Income-tax Act and I hold accordingly. THIRD MEMBER ORDER Per Phool Singh, Judicial Member - There being difference of opinion between the Members, constituting Delhi Bench "A", seized with the disposal of ITA No. 329 Delhi/94, The Hon'ble President of ITAT has referred the following question of difference under section 255(4) of the Income-tax Act, 1961 (hereinafter referred to as the "Act"): "Whether on the facts and in the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee submitted before the CIT (Appeals) that these were two types of FDRs on which interest was earned and such FDRs formed the basic and integral part of the business activities of the assessee. In other words the contention of the assessee was that this was arrangement for providing unbuilt safeguard to all concerned parties for the carrying on the assessee's business. The other additional submission of the assessee was that if the combined interest account was prepared there would have been a debit balance as the interest paid for the entire period was Rs.6.56 lakhs and profit would have been high by the amount of Rs.2,46,045, the amount of interest earned on FDRs. The contention was that interest earned on FDRs in the day-to-day conduct of business activities of the undertaking cannot be excluded from business income for purpose of working the deduction under section 80-I. The CIT (Appeals) after considering the submissions of the assessee did find force and allowed the claim of the assessee by observing that Rs.2,46,045 was to be considered for the purpose of allowing benefit under section 80-I. The Revenue came in appeal and the learned AM who was the author of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajasthan Petro Synthesis Ltd. is again direct on the point involved. Further reliance was placed on the decision of Dunlop India Ltd.'s case, South India Shipping Corpn. Ltd's case and decision of ITAT Delhi Bench "D" in ITA No. 2404/Delhi/99 for assessment year 1995-96 decided on24-3-2000and concluded that assessee has rightly claimed deduction under section 80-I on the amount of interest earned on FDRs. This separate decision authored by learned JM resulted into difference of opinion. 4. I have heard the learned representatives of the parties who have virtually reiterated the same submissions and cited the same case laws before me which were submitted before the Division Bench and before the Income-tax authorities. 4A. I have gone through the case laws which have been cited by both of them in support of their respective claims. Admittedly there are two types of FDRs on which the amount of interest totalling Rs.2,46,045 was earned which is subject matter of claim for deduction under section 80-I. The assessee while booking the orders of customers was getting deposits 20 per cent to 30 per cent of the value of orders and to ensure the safety of the deposits so made customers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Finance (No. 2), Act, 1980 w.e.f.1-4-1981. A special feature of the earlier section 80-I and the existing one is that earlier the expression 'profit attributable to priority industries' was on statute while the Legislature has used expression "any profits and gains derived from an industrial undertaking or a ship or the business of hotel .....". 7. The controversy had since been going on before courts about the scope and actual meaning of expression "attributable to" and "derived from" and Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 had for the first time made a valuable distinction in the above referred to expressions and relevant observation appearing at page 93 of 113 ITR is reproduced as under: "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps have discussed different case laws on the point and interest earned on investment of amounts in contingency reserve of securities specified by Electricity (Supply) Act, was found attributable to priority industries and it was concluded that such interest has to be taken into account in computing special deduction under section 80-I. All these case laws were in respect of expression "attributable to" and Their Lordships on the basis of earlier decision ofApex Courtin the case of Cambay Electric Supply Industrial Co. Ltd. decide in favour of assessee that expression "attributable to" is certainly wider in impact than the expression "derived from" is. 11. However, the Hon'ble Madras High Court in the case of Pandian Chemicals Ltd was seized with the issue relating to claim of assessee for deduction under section 80HH. The expression used under section 80HH is identical to the expression used in section 80-I and Their Lordships concluded that assessee who had deposited the amount with the State Electricity Board and earned interest then such interest income cannot be said to have derived from industrial undertaking as immediate source of interest is the deposit and not business. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paramount Premises (P.) Ltd. It is also to be noted that SLP preferred by the Department against this decision of Bombay High Court in the case of Nagpur Engg. Co. Ltd. stands dismissed by theApex Court. 14. After taking note of the case laws referred to above. I have to scrutinise as to whether the income of interest earned by the assessee on the amounts of FDRs in the circumstances of the case as referred to above, is eligible for deduction under section 80-I or not. To appreciate the legal position it will be in the fitness of things to judge the nature of such income as to whether the income is to be treated as income from business or from other sources. 15. I may point out a direct decision of Bombay High Court on this point in the case of Paramount Premises (P.) Ltd. in which question was as to whether interest income was from the business activity of the assessee or from other sources. Their Lordships confirmed the finding of the Tribunal that interest was assessable as income from business as it emanate from business activities of assessee and no question of law arise for granting reference. This view had been affirmed by that very High Court in the case of Nagpur Engg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as derived from industrial undertaking or not. 18. On this point reliance of the learned AM and that of learned D.R. is on the decision of Hon'ble Madras High Court in the case of Pandian Chemicals Ltd. which is said to be direct on the point. The relevant observation of Their Lordships at page 6 of the report is as under: "It is not all business receipts that would qualify for the deduction and the Legislature has apparently not intended to give the benefit of deduction to all business income. If the intention of the Legislature was to grant relief to all business income, it could have used the expression, profits and gains of industrial undertaking. The fact that the Legislature has used the expression profits and gains derived from the industrial undertaking has some significance and it connotes that the immediate and effective source of income eligible for grant relief under section 80HH must be the industrial undertaking itself and not any other source. The mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80HH. Mere commercial connection between the income and the industrial underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted that phrase "industrial undertaking" is the name given to combined business activities being carried out by the assessee and if the purchases of these FDRs are looked with that angle then it was essential part of the business activities to go for purchase of FDRs and thus earning of interest on such FDRs was having a direct nexus and such profits and gains in the shape of interest on FDRs were having direct nexus with the industrial undertaking. Not only this ratio of Their Lordships in the case of Pandian Chemicals Ltd. vehemently relied upon by the learned D.R. is rather going to support the case of the assessee as facts of this case warrant a wider meaning to be assigned to the words "derived from" as in this case interest earned on the FDRs purchased under the business compulsion of the assessee's industrial undertaking was derived from the said undertaking. Case would have been certainly different if assessee was having surplus funds and purchasing FDRs and earning interest then certainly that would have been outside the purview of industrial undertaking as industrial undertaking of the assessee was to manufacture and sale of tube mill plant equipments. However, in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
