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TMI Blog2022 (9) TMI 1383X X X X Extracts X X X X X X X X Extracts X X X X ..... llant s industrial undertaking. The fact situation in the case on hand also relates to payment of interest on delayed payments of sale proceeds to the assessee. As observed in the Gujarat High Court that there are two methods of realizing sale consideration, the object being to realise sale proceeds at the earliest and without delay. To avoid any loss to the assessee on account of the delayed payments, for the goods supplied, two contingencies can be stipulated (1) charging little higher rate or (2) collecting interest on delayed payments. By this, the transaction would not be incidental or different. In our view, it forms part of the same transaction as the amount due for the goods sold is being paid with some delay for which an interest is being collected. Applying the ratio laid down in the above judgments to the case on hand, it is clear that there is direct nexus between the interest received, goods sold and the payments made including interest for the goods sold. Hence, it can be said that the profits and gains derived was from the business of the assessee and accordingly the interest received on delayed payments for the goods supplied/sold would be entitled to relief of exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember disagreed with the view expressed by the Judicial Member and rejected the plea of the assessee, as such, the matter was referred to a Third Member under Section 255 (4) of the I.T. Act. (c) The issue before the Third Member was "whether on the facts and circumstances of the case, the assessee shall be entitled for deduction under Section 80(I) in respect of interest received on delayed payment by the customers? (d) The Third Member agreed with the view expressed by the Accountant Member and held that the interest receivable from the debtors on account of the delayed payments of sale proceeds is not an income derived from the business of industrial undertaking. The said conclusion was mainly based on the judgment in Nirma Industries vs. ACIT reported in (1995 ITD 199). 4. Aggrieved by the same, the assessee preferred the present appeal. 5. Ms. Jyothi Ratna Anumolu, learned counsel representing Sri Challa Gunaranjan, learned counsel for the appellant, mainly submits that the Tribunal erred in coming to a conclusion that the interest earned from debtors, payable for the delay, in remitting the sale proceeds to the assessee is not an income derived from the industrial under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld storage plant or plants; or (ii) a ship which is first brought into use; or (iii) the business of a hotel which starts functioning, on or after the 1st day of April, 1990, [but before the 1st day of April, 1991], 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-five per cent thereof. Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words ― "twenty-five per cent" the words ― "thirty per cent" had been substituted.] (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent is not land within the meaning of the definition." The above definition was approved and reported by a Constitution Bench of the Hon'ble Supreme Court in Bacha F. Guzdar vs. CIT (1955) 27 ITR 1 (SC). Having regard to the above, the Hon'ble Supreme Court in Pandian Chemicals Ltd. [cited 3 supra] observed that the word "derived from" in Section 80-HH of the Income Tax Act, 1961 must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. 11. As stated earlier, learned Standing Counsel for the Income Tax also relied upon a judgment in Sterling Food case [cited 4 supra]. In the said case, the Hon'ble Supreme Court while negating the claim of the assessee categorically observed that: "There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking." 12. It is to be noted here that in Pandian Chemicals, the assessee made deposits in the Tamil Nadu Electricity Board and was earning interest thereon. For getting power connection, every industrial undertaking had to maintain deposit in Electricity Board. The Division Bench held that the interest derived f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in the instant case is whether the interest paid by the customers for delayed payments on the supplies received by them will be liable for exemption or in other words whether it can be said that the profit or gain received has been derived from an industrial undertaking? The Madras High Court in Madras Motors's case [cited 1 supra], held as under: "…the word, 'derived' is not a term of art and its use in the definition indeed demands an enquiry into the genealogy of the product, but the enquiry should stop as soon as the effective source is discovered and the profit or gain can be said to have been 'derived' from an activity carried on by a person, if the said activity is the immediate and effective source of the said profit or gain… there must be a direct nexus between the activity and the earning of the profit or gain and the income, profit or gain cannot be said to have been derived from any activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner…." 17. Apart from that, the Hon'ble Supreme Court in the judgment referred to earlier, more particularly in Sterling Food ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso. The answer to the question would be certainly in negative. The interest being directly relatable only to the amounts received by the assessee during the course of its business on account of the sale of forgings, would have to be included as the profits and gains derived from the business of the assessee. We hold that this part of the interest would be entitled to be covered by section 80-HH." 20. As stated earlier, the fact situation in the case on hand also relates to payment of interest on delayed payments of sale proceeds to the assessee. As observed in the Gujarat High Court that there are two methods of realizing sale consideration, the object being to realise sale proceeds at the earliest and without delay. To avoid any loss to the assessee on account of the delayed payments, for the goods supplied, two contingencies can be stipulated (1) charging little higher rate or (2) collecting interest on delayed payments. By this, the transaction would not be incidental or different. In our view, it forms part of the same transaction as the amount due for the goods sold is being paid with some delay for which an interest is being collected. 21. Applying the ratio laid down in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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