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TMI Blog2006 (8) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... ure could be attributed to income of such nature. (3) That the Learned CIT(A) has erred in upholding the observation of Learned JCIT that the income of the nature of interest on investments and deposits was taxable under the head 'income from other sources' and not as 'business income'. (4) That the Learned CIT(A) has erred in upholding disallowance of claim under section 36(1)(viia)(c), amounting to Rs. 14,32,03,970 without properly appreciating the facts and the provisions of section 36(1)(viia)(c). That the Learned CIT(A) has wrongly upheld the observation that the Reserves as required to be created under section 36(1)(viia)(c) was not created by the assessee. (5) That the Learned CIT(A) has erred in upholding disallowance of claim of depreciation amounting to Rs. 632,500 on erroneous reasons. (6) That the Learned CIT(A) has erred in upholding levy of interest under section 234C of the Income-tax Act not attracted on facts. (7) That the Learned CIT(A) has erred in initiating proceedings under section 271(1)(c) of the Income-tax Act, which section is not attracted. 3. The Revenue in its appeal has taken following effective ground : (1) (a) On the facts and in the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 36(1)(viii) was claimed. The increase in Special Reserve as defined in section 36(1)(viii) was due to reduction in the value of those incomes, which have arisen on account of activities other than the long-term financing for the industrial development, which has resulted into enhancement of deduction under section 36(1)(viii) by a sum of Rs. 12.41 crores. 7. Thereafter the Assessing Officer observed that as per the original return, the assessee has reduced gross amount of income earned on account of activities other than the long-term financing from the total income in order to arrive at the figure of Special Reserve. The assessee has been receiving interest on investments, which are on FDRs, interest on ICDs, Lease Income, Interest on Leasing Financing to APSEB, Miscellaneous Income, Guarantee Fee and Interest income relating to loans sanctioned for a period less than five years. The deduction under section 36(1)(viii) is allowable only on the income derived from long-term financing for industrial development. The long-term financing means financing or giving loan for a period, which is more than five years. Therefore, any income derived on account of any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores was not allowed by the Assessing Officer and similarly on the same logic the Assessing Officer disallowed the expenditure for earning interest on deposits because the same was treated as income from other sources. 10. Similarly regarding the lease income, the Assessing Officer observed that the assessee has not taken depreciation on the purchase of the plant on paper from APSEB and leased it back to the same concern but has claimed expenditure to earn the lease rental which clearly indicates that there was no expenditure involved to earn lease rental. Regarding Guarantee Fees, the Assessing Officer observed that the very nature of this income shows that there cannot be any expenditure incurred and hence the entire guarantee fee is reduced from the total income to arrive at the figure for calculating deduction and in this manner according to the Assessing Officer the accounting principle followed by the assessee to arrive at the Special Reserve amount on which the assessee could claim deduction under section 36(1)(viii) was not correct and certainly not as per law. For coming to this conclusion, he placed reliance on the decision of Apex Court in the case of Tuticorin Alkalie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other business. Secondly, because deposits were kept in the bank on account of the business exigencies and, lastly, because these amounts were not immediately required and so under compulsion these amounts were required to be parked somewhere. 13. Similar arguments were advanced by the assessee's counsel in respect of guarantee fee. As according to him, the guarantees have been issued for financing power projects and this makes this income an integral part of the main business for providing long-term finance and it would be wrong to suggest that the income from these activities could be divorced from the main activity. Regarding the issue of expenditure attributable to income the learned AR for the assessee contended before the CIT (A) that certain expenses have to be incurred by the assessee for the earning of income from bank deposits, lease income etc. and only the net income, i.e., after deduction of such expenditure should be excluded. He further contended that it could not be said that there were no expenses at all attributable to these incomes as observed by the Assessing Officer because some expenses are involved to earn such incomes. He further contended that Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business and unless it is made the business activity cannot be carried on, then the interest earned thereon becomes business income otherwise it is income from other sources. I see no reason to interfere. It is clear from the details that interest earned has been earned because of surplus funds and not because of any business compulsion. No interference. But following the above logic it is clear that interest earned on three months disbursements for the succeeding period is out of sheer business compulsion and not out of choice. For this reason it has to be treated as part of business income, which qualifies for this deduction. For the other income of interest as per the principle illustrated above, this will be treated as income from other Sources." 16. In respect of lease income, the CIT(A) has held that this would be treated as income qualifying for the deduction by making following observations in his order : "The main object of the business house should be 'carrying on the business of providing long-term finance for industrial or agricultural development or development of infrastructure facility in India.' The assessee-company, while providing long-term finance, leases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome' and third whether the assessee is entitled to claim any expenditure on such income. 19. First, we shall deal with the issue relating to eligibility of deduction under section 36(1)(viii). As per amended provisions of 36(1)(viii) by the Finance Act 1995, w.e.f. 1-4-1996 and by the Finance (II) Act, 1996, the deduction under section 36(1)(viii) of the act is available to the assessee in respect of any special reserve created [and maintained] by a financial corporation which is engaged in providing long-term finance for [industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of business or profession") [before making any deduction under this clause] carried to such reserve account. 20. We have considered the elaborate arguments advanced by senior advocate Shri M.S. Syali assisted by adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sdictional High Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) and CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 (Delhi) interpreting the meaning of the word 'derived from'. Hence, finding no force in the contention of learned AR for the assessee the same is rejected. 24. In short, it can be said that in order to enable the benefit of section 36(1)(viii) of the Act, an amount not exceeding 40 per cent of the profits must be derived by the assessee from such business of providing long-term finance (computed under the head 'Profit & Gains of Business of Profession') before making any deduction under this clause carried to such reserve account. Thus, the important question required to be considered by us is as to what is the implication of the words "derived from such business of providing long-term finance". 25. The implication of the word 'derived from' has been discussed in the cases mentioned herein under : In CIT v. Cement Distributors Ltd. [1994] 208 ITR 355 (Delhi) their Lordships held that- "To be entitled to the relief under section 80HH of the Income-tax Act, 1961, the source of the particular income on which rebate under that section is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen Parliament has made a conscious distinction between the computation of profits and gain from business in the normal course and the computation of such profits and gains of business for the purpose of extending a special benefit to a limited class, it is certainly open to Parliament to prescribe a method to impose a qualification which is different or is absent from computation of the profits and gains of a business in the normal course for purpose of levy of income-tax. The circular issued by the Central Board of Direct Taxes on July 5, 1990, giving certain qualifications relating to deductions under section 80HHC of the Income-tax Act, 1961, wherein it was stated that in view of the amendment to section 28 of the Act, by the Finance Act, 1990, by which clauses (iiia), (iiib) and (iiic) were inserted with retrospective effect, those three import incentives will have to be included in the profits of the business for computing the deduction under section 80HHC, does not constitute any estoppel nor does it prevent the Revenue from contending that the scope of the term 'derived from' in section 80HH is narrower than the term 'attributable to' and that the benefits accruing to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial undertaking". Merely because under the scheme to encourage exports the duty is refunded subsequently by way of "duty drawback", it cannot be regarded as the profit or gain "derived" from the industrial undertaking. It may constitute profits or gains of the business by virtue of section 28 of the Income-tax Act, 1961, but, it cannot be construed as profits or gains "derived" from the industrial undertaking for, its immediate and proximate source is not the industrial undertaking but the scheme for duty drawback. Hence, the amount of duty drawback cannot be regarded as income derived from an industrial undertaking so as to entitle the assessee to a deduction under section 80-I." 31. In the case of Pandian Chemicals Ltd. (supra), their Lordships held at page 506 as under : "Hence, the interest income cannot be held to be derived from the industrial undertaking. In other words, the immediate and effective source of the interest is the deposit and not the industrial undertaking. In addition, as held by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the profits or gains eligible for deduction under section 80HH of the Act must be derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icity 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. Their Lordships further held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under section 80HH." 33. In this very decision their Lordships in respect of the Rules of interpretation with regard to the words 'derived from' used in section 80HH further observed as under : "Rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal there is no scope for importing the rule of liberal interpretation." 34. In the case of Orissa State Warehousing Corpn. v. CIT [1999] 237 ITR 589 though the Apex Court was concerned with the interpretation of section 10(29) of the Act, their Lordships observed "that section 10(29) is categorical in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit. 38. In Kirloskar Electrodyne Ltd. v. Dy. CIT [2004] 271 ITR (AT) 69 (Pune) (IIIrd Member) the Tribunal held - "In order to enable the benefit of section 80-I of the Act, the assessee must derive income from manufacturing or production of any article or thing not being any article or thing specified in the list in the Eleventh Schedule. The term 'derive' connotes to draw or receive, or obtain as from a source or origin. The deduction under section 80-I of the Act is to be allowed with reference to the profits and gains derived from an eligible industrial undertakings. The expression 'derived from' has a definite, but narrow meaning and it cannot receive a flexible or wider concept. The word 'derived' is narrower in application compared with the word 'attributable'. 39. In CIT v. Alpine Solwax Ltd. [2005] 144 Taxman 67 (MP) in Paras 11 and 12 of the Judgment it was held as under : "The assessee was entitled to claim deduction of that amount which it had derived as direct profit by sale of manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 80-I, what has to be excluded is not the gross receipt but the income arising out of this receipt. Such income could only be computed by deducting the cost of raw material destroyed in fire from the gross receipt of insurance claims. The raw material had been admittedly purchased during the year under consideration and its cost debited in the purchase account of the year. Therefore, the Tribunal was not right in giving deduction under section 80-I of a certain amount received as compensation from insurance company against loss of raw material in fire. However, in view of the observations made above, the Tribunal would compute the profit attributable to the receipt of insurance claim and exclude only such profit out of the total income for working out the deduction under section 80-I." 42. In CIT v. Andaman Timber Industries Ltd. [2000] 242 ITR 204 (Cal.) the question before their Lordship was whether transport subsidy received by the assessee could be held to be income 'derived from' industrial undertaking, their Lordships answered the question in favour of the revenue. 43. In North East Gases (P.) Ltd. v. CIT [1996] 220 ITR 372 (Gau.) the question before their Lordships w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P 330 (SB), relied upon by the Learned AR for the assessee, the Tribunal while computing rebate under section 80HHC held that the interest earned by the assessee was business income for the purposes of section 80HHC as it was part and parcel of the main business. So, the interest earned was an incidental receipt generated in a manner business of export was carried on with the gaps of time by the assessee and hence eligible for rebate under section 80HHC. On going through the case law (supra) it is clear that while adjudicating upon the deduction under section 80HHC the Tribunal was only required to resolve as to whether the interest receipt of the assessee was business income, because it formed part of the main business of the assessee, and whether the same was eligible for deduction under section 80HHC. In that case (supra) the Tribunal was not required to solve the issue whether the interest earned by the assessee was eligible for deduction under section 80HHC because it was derived from the export of such goods or merchandise by the assessee and rightly so because after he amended provisions of section 80HHC, which came into effect from 1-4-1992, the assessee was only required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be held that the income, eligible for relief under section 36(1)(vii), should also be derived from that business of the assessee, as mentioned in section 36(1)(viii) of the I.T. Act. 48. In Asstt. CIT v. Gallium Equipment (P.) Ltd. [2001] 79 ITD 41 (Delhi) 3rd member, relied upon by the learned AR for the assessee, the Tribunal while holding that the assessee was entitled to claim benefit in respect of interest received on FDRs under section 80-I observed that 'the assessee was a manufacturer and getting advance from the customers who were asking for bank guarantee on such advancement. Bank guarantee was being issued by the banks only against FDRs and for that the assessee admittedly borrowed funds from those banks and purchased FDRs against which banks issued bank guarantee to customers on two occasions. In view of these facts FDRs were totally inter-woven in the carrying on of the business. In other words purchases of FDRs constituted an integral part of the assessee's business. FDRs provided infrastructure for the picking of the orders and the making of the supplies by the assessee for the carrying on of the assessee's business. In other words the business of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -I, the Tribunal further simply held that these deductions also had to be allowed to the assessee because the unit of the assessee was an industrial undertaking and the interest income was interest derived from industrial undertaking, though without elaborately adverting to and discussing the meaning of 'derived from' used in sections 80HH and 80-I and without even discussing as to how the interest income earned by the assessee was income derived from the industrial undertaking and even without discussing the decision of jurisdictional High Court of Delhi on the identical issue in the case of Ritesh Industries Ltd. (supra), as well as the guidelines ascribing to the meaning of 'derived from' laid in the recent decision of Pandian Chemicals Ltd. (supra), wherein a contrary view has been taken and which appears to be not available to the Tribunal in the case (supra) decided by it while holding the above view. Hence, again we observe that in the light of cantina of decisions referred to and discussed in our order the view taken by the Tribunal in the above-mentioned case (supra) cannot be taken to be the right view and hence is of no assistance to the assessee. 50. In the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's business was of organizing tours for foreign tourists which included booking of hotels, transportation by various airlines and for that purpose the assessee received certain amounts in advance from the foreign tourists and the same was deposited in the bank account on certain conditions laid down by ITAT, so, the assessee had to maintain certain cash balances in its hand or in the bank, therefore, it was forced to keep balance in bank and so the interest income received on the FDRs was inextricably linked with the business activity of the assessee and there was no purpose of the assessee to do any other business and, further, because the Tribunal after examining the issue in the earlier years also had held that the interest income derived from the services rendered to the foreign tourists was the business income of the assessee. Further, on the reasoning that the provisions of section 80HHD of the Act were akin to provisions of section 80HHC of the Act and not to section 80HH of the Act and that in various cases the Hon'ble Courts/Benches of ITAT have held that the assessee would be entitled to deduction under section 80HHC of the Act even if it was not entitled to dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) for resolving the issue of deduction under section 80HHD is of no relevance for resolving the issue under consideration before us. Hence, as far as application of ratio of the decision of the Tribunal in the case of Sita World Travel (I) Ltd. (supra) is concerned we may mention that facts and issue and even the section 36(1)(viii) under consideration before us is not akin to section 80HHD or 80HHC but the implication of the words 'derived from' used in section 80HH and 80J, analyzed by the various High Courts and the Apex Court is only of immense importance and cannot be lost sight of whenever and wherever the words 'derived from' are used in sections of Income-tax Act for allowing the benefit to the assessee under that particular section. 54. In the above-mentioned facts, we find the case of Sita World Travel (I) Ltd. (supra) referred to by learned AR, being distinguishable on facts, is of no help to the assessee for deciding the issue involved in the case under consideration before us, i.e., for the purpose of deciding the implications of the words 'derived from' used in section 36(1)(viii) of Income-tax Act for allowing the benefit to the assessee. 55. Now, we proceed to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard is upheld and this part of the issue stands decided in favour of the assessee and against the revenue. 58. Now, we proceed to discuss the case of the assessee in respect of interest income and guarantee fee by considering implication of the words 'derived from' used in this section, as well as application of the same for allowing the benefit for the same under section 36(1)(viii). 59. Undisputedly the assessee's main business is of providing long term finance, of over 5 years duration, for power projects resulting in interest receipts on the long term advances and not earning of interest income on investments, FDRs, ICDs and guarantee fee etc. Regarding interest on bank deposits the assessee's contention is that there was a condition in project agreements with Asian Development Bank, International Bank with regard to reconstruction and development that the Corporation should maintain liquidity equal to projected 3 months disbursements, so, it was not by choice but by compulsion that the deposits were kept with the bank and hence the interest was earned by placing such funds for disbursement in succeeding 3 months. 60. In respect of other deposits, according to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits and gains of the business by virtue of section 28 of IT Act, but it cannot be construed as profits and gains 'derived from' the industrial undertaking because its immediate and proximate source is not the industrial undertaking. It further emerges from the decision of the Apex Court in Pandian Chemicals Ltd. (supra) that the rules of interpretation would come into play only if there is any doubt with regard to the expressed language used. Where the words are unequivocal there is no scope of importing the rule of interpretation. Thus, we find that the Parliament has made a conscious distinction between the computation of profits and gains from business in the normal course and the computation of profits and gains of business for the purpose of extending a special benefit, which is clearly demonstrative from the fact that in view of the amendment of section 28 of the Act Clauses III-A, III-B and III-C were inserted with retrospective effect for including the 3 import incentives in profits of business for computing the deduction under section 80HHC. But it does not mean that the same benefit could be extended within the scope of the term 'attributable to' and hence in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at the meaning of the words/phrase 'derived from' used in section 36(1)(viii) as well as in other sections i.e. 80HH, 80-I and 80J. In the instant case the question 'under consideration' before us is whether the interest income earned by the assessee from investments and deposits, lease income and guarantee fee can be termed as business income of the assessee eligible for relief under section 36(1)(viii) of IT Act. According to the assessee the same was eligible for the relief under section 36(1)(viii) of I.T. Act as the interest income from such investments and deposits were made firstly because all such funds required for the business activity were lying idle and hence invested in short term deposits and further because these invests were made out of business compulsion or business necessity like providing bank guarantees for certain transactions, for opening LC for export purpose, for getting the facility and services of Government departments and lastly these deposits had to be made otherwise the business activity could not be carried on by the assessee. Meaning thereby that these investments and interest and lease income and guarantee fee earned by the assessee was out of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of lease income is upheld. Consequently the first issue stands partly decided against the assessee and partly against the revenue. 65. In the light of our findings recorded hereinabove now we shall be considering whether the income earned by the assessee from interest on deposits, on investments, ICDs and guarantee fee were to be considered under the head 'business income' or under the head 'income from the other sources' and in case it is held that the same be considered under the head business income then whether the assessee is entitled to the deduction of expenditure on the same and if yes, then whether it is to be allowed at the rate of 37.38 per cent claimed by the assessee or on the basis of the proportion at which the other expenditure bears to the remaining income of the assessee . 66. In the instant case the Commissioner of Income-tax (A) on the basis of his discussions has arrived at a finding that the assessee was compelled to make the investments, bank deposits and bank guarantee on which the assessee earned interest as well as the guarantee fee had to be made either because these funds were not required by the assessee for its business activity and were lying i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax (A) had made such observations which have been upheld by us hereinabove treating the same to be very logical and reasonable but we find that no such directions were issued by the Commissioner of Income-tax (A) in his order, so, now, while upholding the order of the Commissioner of Income-tax (A) to the extent as observed hereinabove by us, we restore the issue to the file of Assessing Officer for considering the expenses incurred by the assessee for such income of interest and guarantee fee as has been held by us to be 'business income' after examining each expense and see its applicability to the earning of such income and thereafter considered the allowability of the same to the assessee. 69. Now, we shall deal with the issue involved in Ground No. 4 relating to deduction claimed by the assessee under section 36(1)(viia)(c) of IT Act in respect of any provision for bad and doubtful debt made by an eligible assessee not exceeding 5 per cent of the total income. 70. The relevant and material facts for the disposal of this appeal as borne out from the order of the tax authorities below are that the assessee has claimed deduction under section 36(1)(vii)(c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and doubtful debt and thereafter he disallowed the entire sum of Rs. 14,32,03,970 claimed by the assessee as provision for bad and doubtful debt. 73. Aggrieved with the order of Assessing Officer, the assessee filed an appeal before the CIT(A) and CIT(A) after considering the provisions of section 36(1)(viia)(c), 36(2)(v) as well as the conditions imposed upon the assessee by the C&AG was of the opinion that the deduction claimed by the assessee under section 36(1)(viia)(c) was a statutory deduction and since in this case the statutory conditions required under this provision to be mandatorily fulfilled have not been complied by the assessee, whatever be the observations of CAG, it cannot override the provisions of IT Act. Further, that once the Act requires that such a reserve has to be made then the assessee cannot be allowed to say, by giving arguments based on generalized discussion, that even if it has not created the reserve it is entitled to claim the deduction. Thereafter agreeing with the logic given by the Assessing Officer the CIT(A) upheld the impugned disallowance made by the Assessing Officer relating to deduction claimed by the assessee in respect of provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 88 St.), the assessee should be taken to have complied with the requirement of making the said provision for claiming deduction under clause (viia)(c) of section 36(1). We further find that unlike various other sections there is no pre-condition, that the amount claimed under clause (viia)(c) cannot be allowed under the same if it is debited above the line in the profit and loss account because such a condition for example is a pre-requisite for claiming the deduction for investment allowance under section 32A(4)(ii). In Syndicate Bank v. Dy. CIT [2001] 78 ITD 103 , Bangalore, in para 17 the Tribunal observed that the provision of section 36(1)(viia) need not relate specifically to advance made, so as a corollary it can be inferred that even the expected losses are covered by this clause and so it is a reserve in guise of provision and hence in our opinion a mere debit in the appropriation amount would not disentitle the assessee from claiming such deduction. Even in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 , the Apex Court observed at pg. 367 that once a particular entry is made as per the mandate of applicable directive, debit as such does not defeat the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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