9911796707
TMI Blog2010 (7) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company is to provide long term finance for the purpose of transmission, distribution and generation of electricity projects to cater to the needs of the rural areas. The applicant sanctioned loans from time to time to the Madhya Pradesh State Electricity Board (MPSEB) for which the Madhya Pradesh Government had given the guarantee for repayment. The guarantees were executed on various occasions. The MPSEB defaulted in the repayment of loan and the total overdue amount is said to be Rs.1750 crores. In order to discharge this liability, the MP Government - the guarantor of the loan - went through a process of settlement with the applicant Corporation. A tripartite agreement was entered into on 14th January, 2005 to which the applicant - REC, the Government of Madhya Pradesh and MPSEB are parties. It is recited therein that REC has agreed to the request of the Government of MP for settlement of outstanding dues in a phased manner and the Government of MP in its endeavour towards re-structuring and reforming the Power Sector in the State, has assumed the responsibility for payment of Rs.1414.80 crores (Rs.912.74 crores of principal loan amount plus Rs.502.06 crores of overdu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business computed under the head "Profits and gains of business or profession" (before making any deduction unde this clause) carried to such reserve amount: Provided ..................... Explanation - In this clause, - (a) "specified entity" means - (i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956); (ii) a financial corporation which is a public sector company; (iii) a banking company; (iv) a cooperative bank other than a primary agricultural credit society or a primacy cooperative agricultural and rural development bank; (v) a housing finance company; and (vi) any other financial corporation including a public company' (b) "eligible business" means - (i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for - (A) industrial or agricultural development (B) development of infrastructure facility in India; or (C) development of housing in India. (ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here." 8. In the case of CIT vs. Sterling Foods (237 ITR 579) what fell for consideration was whether receipts from the sale of import entitlements could be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act. That question was answered in the negative while interpreting the expression "derived from". It was observed by the Supreme Court thus: "We do not think that the source of import entitlements can be said to be the industrial undertaking of the assessee. The source of the import can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid or promised, or of money. Lease money for such transfer, having no direct nexus with the profits or gains from the property transferred for use, cannot, therefore, be said to be "profits and gains derived from an industrial undertaking" within the meaning of Section 80HH of the Act. It is entirely of a different character and species from profits and gains derived from the running of an industrial undertaking. Fixed lease money as herein is not dependent on the running of industrial undertaking." 11. Thus, in the light of the above interpretation, we must consider whether the profits by way of interest from the bonds given by the guarantor i.e. M.P. State Government has direct nexus with the business of providing long term finance in which the applicant is engaged. It is the case of the Revenue that the direct nexus is lacking in the instant case because the income has been earned by the applicant on bonds issued by the Government of M.P. which has never taken any loan. It is pointed out that there is no real connection between the interest earned on bonds and the business of the assessee i.e. financing Power Projects. To buttress its argument, the Revenue has referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as pre-payment premium. This premium has been received in consideration of re - schedulement of loan by agreeing for closure of the loan before the stipulated period. The applicant has charged this amount to compensate for the loss of interest over a period of time. It is seen from one of the documents filed by the applicant that on 1st September, 2005, the borrower Arkay Energy Limited requested the applicant to accept the pre-payment of the term loan aggregating to Rs.48 crores as it wanted to avail of financial facilities from IDFC Mumbai. The loan was payable in quarterly installments. This request has been favorably considered by the applicant as seen from the communication dated 26.7.2006. The statement explaining the calculation of premium has been filed by the applicant. It appears to us that the amount realized by way of premium from the said party is integrally connected with the transaction of long term financing even if it is not in the nature of interest. It cannot be regarded as anything other than the profits derived from long term financing provided to Arkay Energy Ltd. In this context, one significant fact to be taken note of is that in the loan agreement betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
