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TMI Blog2010 (7) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... as a guarantor. The execution of bonds is a part of the same transaction. The guarantor assumed the position of principal debtor, pursuant to the tripartite agreement. - applicant is eligible for deduction upto 20% u/s 36(1)(viii) - pre-payment premium to repay the long term loan before its maturity received by the applicant is income from long term finance for the purpose of deduction under section 36(1)(viii) - Instead of receiving interest over a long period a time as per the original loan agreement, a lump sum amount has been received by the applicant in full satisfaction of its claim. - the fact that the entries were made in the accounts showing the same as "other income" is not really material to determine the true character of the receipt. The pre-payment premium with which we are concerned in the present application is no different from the 'swapping premium' - answered in favor of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... early. The Board on its part undertook and agreed to pay the balance amount of Rs.335.20 crores with interest of 8% per annum with effect from 1.4.2007 to the REC in 150 monthly instalments commencing from 1.4.2007. The Government of MP also guaranteed the payment of said Rs.335.20 crores with interest by MPSEB. 2. The first question raised in the application is whether the applicant- Corporation is entitled to deduction under section 36(1)(viii) of the IT Act up to 20% of the profit, in relation to the interest income derived by it from the Bonds issued by MP State Government. The question framed by the applicant is: "Whether interest income on Bonds issued by Madhya Pradesh Government in lieu of outstanding loan and interest thereon from Madhya Pradesh Electricity Board is income from Long Term Finance for the purpose of Deduction u/s 36(1)(viii)?". 3. Before proceeding further, we may mention that this application has been filed on receipt of notice under section 143 of the Income-tax Act, 1961 for the year 2007-08 proposing to disallow the deduction under section 36(1)(viii). 4. It is the contention of the applicant that the amount of interest on bonds is the profits derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of industrial or agricultural development or development of infrastructural facilities has not been disputed or cannot be disputed. In fact, in the ruling of this Authority in AAR. 758/2007 it was held that the applicant carries on eligible business within the meaning of sub-clauses (A) and (B) of the definition of 'eligible business'. Further, there can possibly be no dispute on the aspect of creation and maintenance of 'special reserve' which is borne out by the entries in the profit and loss account. Therefore, the only controversy turns on the question whether the interest on the bonds can be brought within the scope of the expression "profits derived from eligible business" i.e. the business of providing long term finance for the two specified purposes. We are of the view that the applicant can legitimately claim deduction under sub-clause (viii) of section 36(1). 6. We shall first see how the expression 'profits derived from' has been construed by the Supreme Court. 7. In National Organic Industries Limited vs. Collector of Central Excise [(1997) 106 STC 467], it was observed that the products viz. ………. must be held to have been derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom." "It is clear, therefore, that the word 'derived from' in section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself." 10. In the case of CIT vs. Cement Distributors Limited, a division bench of the Delhi High Court interpreted the expression "profits derived from an industrial undertaking" occurring in Section 80HH in a similar manner. The High Court relied, inter alia, on the decision of the Supreme Court in Cambay Electric Supply Industrial Co. vs. CIT (113 ITR 84) and observed thus: "Thus, the word "derived" has to be assigned a restricted meaning as compared to the words "attributable to" or "referable to" and therefore, to avail of a rebate under section 80HH, an assessee must establish that he has derived profits or gains from the industrial undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of long term loan given by the applicant to MPSEB. It cannot be viewed as a different transaction unconnected with the business of long term financing. It is clear from the facts stated by the applicant as well as the tripartite agreement, that MP Government guaranteed the repayment of the loans advanced to erstwhile MPSEB together with interest by executing unconditional and irrevocable guarantee deeds on different dates and the guarantor (State of M.P.) was faced with the demands for paying the loans covered by the guarantee in view of the default on the part of MPSEB. It was well settled that the liability of guarantor is co-extensive with that of the principal debtor. It is in these circumstances that the State Government came forward with an offer to discharge the liability by issuing the bonds. By doing so, the State Government has only discharged the pre-existing liability as guarantor. We are unable to see how the act of settlement and the mode of discharging the defaulted loan can be dissociated from the long term finance made available by the applicant to MPSEB. The direct link is not in any way snapped and the interest income accruing from the issue of bonds by the Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to accept the contention of the Revenue that this income is only incidental to the business of the assessee and has no direct nexus with the business of long term financing. As seen from the Agreement, even at the time of entering into the agreement, the parties did contemplate such a situation and specifically provided for the pre-mature closure of the loan account by accepting certain amount as premium. Instead of receiving interest over a long period a time as per the original loan agreement, a lump sum amount has been received by the applicant in full satisfaction of its claim. This Authority, in the Ruling in AAR No. 758 of 2007 arising out an application filed by the same applicant held that the "swapping premium" is an allowable deduction under section 36(1)(viii). It was further held that the fact that the entries were made in the accounts showing the same as "other income" is not really material to determine the true character of the receipt. The pre-payment premium with which we are concerned in the present application is no different from the 'swapping premium'. Hence, the second question too has to be answered in the affirmative and in favour of the applicant. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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