Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income-Tax vs Gallium Equipment (P.) Ltd. on 23 April, 2001
ORDER
R.S. Syal, Accountant Member
1. This is an appeal filed at the instance of the revenue against the order passed by the Commissioner of Income-tax (Appeals) on 12-11-1993 relevant to assessment year 1989-90.
2. The solitary ground projects the grievance of the revenue as under:--
"On the facts and in the circumstances of the case, the learned CIT(Appeals) has erred in directing the Assessing Officer to allow deduction under section 80-I by considering the interest on FDR, Misc. receipts and chit dividend as part of business income entitled to deduction despite the fact that these receipts are not industrial activities carried on by the assessee-company."
3. Briefly stated the facts of the case are that the Assessing Officer while framing assessment did not consider interest income of Rs. 2,46,045 for the purposes of allowing deduction 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 favour. It was thus pointed out that two types of FDRs had to be provided to the bank on which interest was earned. It was explained on behalf of the assessee that these were in the course of carrying on of the business and the assessee was justified in claiming deduction under section 80-I on the interest earned on these FDRs. The learned CIT(Appeals) concurred with the submissions of the assessee and reversed the order of the Assessing Officer on this count, thus allowing the benefit of deduction under section 80-I on the interest earned by the assessee on FDRs.
4. Before us the learned DR contended that the assessee could not be granted deduction under section 80-I on the interest earned by it on FDRs for the reason that this section allowed deduction only in respect of profits and gains from industrial undertaking. Since the interest on FDRs could not be said to be derived from industrial undertaking, she contended that the CIT(Appeals) had fallen in error in accepting the assessee's claim for allowing deduction under this section on the interest earned by it on FDRs. She relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 for the proposition that the expression 'derive from' was narrower in scope from the expression "attributable to". On this reasoning she contended that the interest earned on FDRs could not be characterised as "derived from" industrial undertaking and hence the assessee was not entitled to the deduction under section 80-I on the interest earned on FDRs.
5. On the other hand, the learned counsel for the assessee reiterated the submissions as advanced before the first appellate authority and on the basis of his reasoning contended that his order be maintained. He relied on the following authorities for the proposition that the interest earned on FDRs should be considered for granting deduction under section 80-I:--
(1) Rajasthan Petro Synthetics Ltd. v. Dy. CIT[1997] 60 ITD 682 (Delhi);
(2) CIT v. Dunlop India Ltd. [1992] 197 ITR 34 (Cal.);
(3) CIT v. South India Shipping Corpn. Ltd. [1995] 216 ITR 651 (Mad.);
(4) CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.); and (5) CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC).
6. The learned counsel for the assessee on the basis of these authorities strongly urged that his case was squarely covered by these judgments 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 section 80-I. Thus any income which can be said to be "derived from" the industrial undertaking can be covered in the ambit of section 80-I. The Legislature has used expression "derived from" in this sub-section. It has been held on several occasions by the Hon'ble Supreme Court that the expression "derived from" is narrower in scope than the expression "attributable to". In Sterling Foods (supra) it was held as under :--
"The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became 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 reasons of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961."
The Hon'ble Supreme Court in this case was dealing with section 80HH. If we look at the section 80-I, it becomes obvious that in both the sections the Legislature has implied the expression 'any profits and gains derived from an industrial undertaking'. Thus the ratio set out in this case would squarely apply to section 80-I also. In the like manner the Hon'ble Supreme Court elaborated the distinction between the expressions "derived from" and "attributable to" in Ashok Leyland Ltd. v. CIT[1997] 224 ITR 122 (SC) where it was held as under :--
"In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the Legislature intended to cover receipts from sources other than the actual conduct 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 position correctly. Before parting with this appeal it may be relevant to mention that all the authorities cited by the learned counsel for the assessee were prior to the delivering of the judgment by the Hon'ble Supreme Court in the case of Sterling Food (supra). Thus those authorities, so far as relevant on the issue, should be treated as impliedly reversed by the Supreme Court.
9. In the result, the appeal is dismissed.
R.K. Gupta, Judicial Member
1. After going through the proposed order carefully and having discussion with my learned brother I have not been able to persuade myself to agree with the view taken by him for the reasons given hereafter.
2. The facts briefly have already been discussed in the proposed order of my learned brother as above. The question before the Tribunal for decision in appeal filed by the department, was on the following issue :--
"On the facts and in the circumstances of the case, the learned CIT(Appeals) has erred in directing the Assessing Officer to allow deduction under section 80-I by considering the interest on FDR, Misc. receipts and Chit dividend as part of business income entitled to deduction despite the fact that these receipts are not industrial activities carried on by the assessee-company."
3. At the time of hearing it was clarified by the learned DR that the issue in dispute is only in regard to interest on FDR and not any other miscellaneous receipt of chit dividend, as mentioned in the grounds of appeal. At the cost of repetition but for the sake of convenience, I would like to discuss the brief facts once again. The assessee shown deduction on account of interest in the profit & loss account and after considering the details of interest filed before the Assessing Officer, it was noted by him that assessee has set off the amount of interest of Rs. 2,46,045 received on FDRs, against the payment of interest on borrowed funds at Rs. 6.56 lakhs. For the purpose of allowing the deduction under section 80-I of the Income-tax Act, the Assessing Officer did not allow the set off of the interest received on FDR against the payment of interest, by holding that earned interest is not from business of industrial undertaking, Accordingly to this extent the deduction under section 80-I was not allowed by the Assessing Officer. The assessee preferred first appeal before the CIT(Appeals), who after considering the material on 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 was earned. It was also explained that these were in the course of carrying on the business and the assessee was justified in claiming the deduction under section 80-I on the interest earned on these FDRs. Therefore, for these reasons the CIT(Appeals) took the view that assessee is eligible for deduction under section 80-I.
4. The Department has preferred appeal against this finding of the CIT(Appeals) before the Tribunal and the Tribunal heard the appeal of the department on 25-5-2000. The case was allotted to the Accountant Member for the purpose of writing the order and the learned brother has written the proposed order. As I have already stated that I could not persuade myself for agreeing with the view taken by my learned brother, hence I am going to write my own order.
5. My brother took the view that interest earned on FDRs is not derived from the business of the industrial undertaking of the assessee. Therefore, the assessee is not eligible for deduction under section 80-I, While taking this view, my brother has placed reliance on the decision of the Hon'ble Supreme Court in the case of Sterling Foods (supra), wherein the expression "derived from" and "attributable to" are discussed. Further my brother has placed reliance on the decision of the Hon'ble Supreme Court in the case of Ashok Leyland Ltd. (supra), wherein also the expression 'derived from' and 'attributable to' have been discussed. Lastly my brother has placed reliance on the decision of Madras High Court in the case of Fenner (India) Ltd. (supra), wherein 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 20 per cent in the process of computation of the profits and gains of the said industrial undertaking. In view of the findings of the Hon'ble Madras High Court, my brother took the view that the interest earned on FDRs in the instant case can be termed as attributable to industrial undertaking, but not derived from it. Though this decision of the Madras High Court was neither cited by the learned DR nor by the assessee, even then the ratio of this decision was taken into consideration by my learned brother. Under these circumstances, he took the view that deduction under section 80-I is not allowable to the assessee. During the course of hearing of appeal by Tribunal, the learned counsel has placed reliance on the following decisions :--
(1) Rajasthan Petro Synthetics Ltd. (supra);
(2) Dunlop India Ltd. (supra);
(3) South India Shipping Corpn. Ltd. (supra);
(4) Paramount Premises (P.) Ltd. (supra) and (5) Cocanada Radhaswami Bank Ltd. (supra).
These decisions were not considered by my learned brother because of the latest decision of the Apex Court in case of Sterling Foods (supra).
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 it was attributable to the business activity and not derived from, then the same analogy should be applied on the payment of interest which was paid on account of borrowed funds which were for the purpose of activity of business of industrial undertaking, then this amount should also be considered as attributable to not for the purpose of business of the industrial undertaking. In that case the income of the assessee will be enhanced by Rs. 6.56 lakhs and in that case, deduction under section 80-I will be much more against the deduction claimed on the interest earned at Rs. 2,46,045. In fact this is a case of netting of the two interests which was for the purpose of business only. The interest payment was for the purpose of business as the borrowed funds were used only for business purpose. There is no dispute in this regard, and the interest income earned on FDRs was for business purposes because the FDRs were obtained for the purpose of security as required by the Bank. Therefore, these FDRs were obtained for smooth running of the business. Therefore, this income is also from business activity of the industrial undertaking of the assessee. This is not a case where only interest income was earned and no payment was made on account of interest, here both interests were involved, as payments were there and receipts were there. Therefore, this is a case of netting of two interests, which the assessee has rightly netted and net amount was shown in its profit & loss account.
7. Now I would like to discuss the case on which my learned brother has placed reliance. In the case of Sterling Foods (supra), the facts are different. In this case the assessee claimed deduction under section 80HH on the income earned out of sale of import entitlement granted by the Central Government under the Export Promotion Scheme. The Hon'ble Supreme Court has held that these receipts were incidental to the business activity of the assessee, but not from the business activity of the undertaking. Therefore, deduction under section 80HH was not allowed. One more fact is also emerges from the facts of this case that the assessee was entitled to use the import entitlement itself or sell the same to others. It clearly shows that assessee can use this import entitlement for itself also. Therefore, the sale to others cannot be termed as business of the undertaking, as the main business of the assessee 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 (supra) 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 (supra) is not applicable on the facts of the present case.'
8. I have also seen the decision in the case of Fenner India Ltd. (supra). 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 CIT v. Pandian Chemicals Ltd, [1998] 233 ITR 497 (Mad.). No facts were given in the case of Fenner (India) Ltd. (supra), as simply the decision in case of Pandian Chemicals Ltd. (supra) was followed. I have seen the facts in the case of Pandian Chemicals Ltd. (supra). The facts were that assessee preferred security to the Electricity Board as the same was conditional for supplying electricity. The assessee claimed interest earned on these securities for the purpose of deduction under section 80HH. By following some other decision the Madras High Court has held that the interest income was not from direct source of the business undertaking. Therefore, it is not eligible for deduction under section 80HH. The facts of this case are also distinguishable, as there was no discussion in the order that whether the assessee had made any payment on account of interest on borrowed funds; whereas in the case before us the assessee has also paid interest on borrowed funds and interest earned on FDRs, which was conditional, were netted off. Therefore, the facts are different, in the present case here before us.
9. A later decision of the Apex Court is available in the case of Vellore Electric Corpn. Ltd. v. CIT[1997] 227 ITR 557, which was decided on 8th July, 1997. The decision in the case of Pandian Chemicals Ltd. (supra) was decided on 29-4-1997. In the case of Vellore Electric Corpn. Ltd. (supra) the facts were identical as the facts in the case of Pandian Chemicals Ltd. (supra). In this case the investments of amounts in contingency reserve in securities specified by Electricity Supply Act and the interest on such sums was held attributable to priority industry and it was further held that the same has to be taken into account in computing special deduction under section 80-I. The decision of the Madras High Court in the case of Vellore Electric Corpn. Ltd. v. CIT[1977] 109 ITR 454, was affirmed on this point. Therefore, the decision of the Madras High Court in case of Pandian Chemicals Ltd. (supra) cannot be relied upon now, when the decision of the Apex Court, which was decided on a later date, is available and is on the identical issue. My learned brother has also placed reliance in the case of Ashok Layland Ltd. (supra), where the words "attributable to" and "derived from" were discussed and ultimately the deduction under section 80-I was allowed by the Apex Court. The brief facts in the case of Ashok Leyland Ltd. (supra) were, that the appellant claimed relief under section 80-I on the income earned by it from import and sale of spare parts. The ITO took the view that the import and sale of spare parts was not attributable to the industry carried on by the appellant and, therefore, the income arising therefrom did not qualify for the benefit of section 80-I. The Tribunal found that 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 80B(7), the profits and gains arising from import and sale of spare parts were attributable to the industry carried on by the appellant. However, my learned brother has placed reliance on this decision in regard to 'attributable to', whereas in this decision the Hon'ble Supreme Court has held that the income earned by the company from import and sale of spare parts was eligible for deduction under section 80-I. This is a direct decision on the point. The facts in the case here before us is on a stronger footing. The interest was earned on FDRs, which were taken as per condition of the bank and assessee has also paid interest on borrowed funds. Both the interests were netted off. Therefore, in my considered view, the interest earned by the assessee on FDRs was eligible for deduction under section 80-I, as there was a direct nexus.
10. For the sake of completeness in the case of Sterling Foods (supra) the Hon'ble Supreme Court has held that there was no direct nexus in regard to the sale of import entitlement; whereas in the present case here before us, there is a direct nexus. When there is a direct nexus then it has to be held that the interest earned on FDR is the income of the industrial undertaking and not from other sources. Therefore, this income qualifies for the purpose of deduction under section 80-I of the Act.
11. Now I would like to see the cases on which the reliance has been placed by the learned counsel of the assessee. In the case of Rajasthan Petro Synthetics Ltd (supra), the Tribunal has held that "There is some force in the argument of learned authorised representative of the assessee that since deposits like fixed deposit with bank kept as margin for establishment letter of credit for importing raw material or trade advances to the parties or security for godowns taken on rent are deposits necessary either for complying with statutory requirements or for carrying on of business by the assessee, interest received thereon should form part of the business profits of the industrial undertaking".
12. In the case of Dunlop India Ltd. (supra) it was held: "If the security had to be furnished for the purpose of carrying on the business of priority industry, then the interest receipts earned from these securities would have to be treated as part of profit gains attributable to the priority industry. The income by way of interest on securities was entitled to deduction under section 80-I".
13. In the case of South India Shipping Corpn. Ltd. (supra), it was held that there was a nexus between shipping business of the assessee-company and the interest accrued on the London broker's business activity. Accordingly the income derived by way of interest from the London brokers 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, Delhi has 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 on 24th 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 Commissioner of Income-tax has directed the Assessing Officer to disallow deduction representing advance excise duty paid and reflected under the head loans & advances. Further the Assessing Officer was directed to exclude 90 per cent of interest income for the purpose of computing deduction under section 80HHC, 80HH and 80-I. The issue was discussed in detail by the Tribunal, where I was one of the party to this order, and ultimately it was held that the assessee is entitled to deduction under section 80HHC, 80HH and 80-I as the interest was earned for the purpose of business of the industrial undertaking. There was also payment of interest on the borrowed funds which was more than the interest earned by the assessee. In this case also the assessee has netted both the interests and then it was reflected in the profit & loss account. The Assessing Officer has allowed the deduction while passing assessment under section 143(3). However, as I have already stated, the CIT took action under section 263 and the Assessing Officer was directed to disallow the deduction on the interest earned by the assessee under various sections stated above. While deciding this issue the ratio of the decision of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172 and ratio of the decision in the case of CIT v. Bokaro Steels [1999] 236 ITR 315 was also discussed. Some other decisions were also discussed. A decision in the case of Pink Starv. Dy. CIT[2000] 72 ITD 137 (Mum.) was also discussed. Similar issue was involved in the case of Pink Star (supra) as in the case of Honda Seil Power Products Ltd. (supra). In the case of Pink Star (supra) also, the ratio of the decision in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steels (supra) were discussed and then it was held that the interest income was inextricably linked with the business of the assessee and hence the adjustment made by the assessee on account of both the interests was correct. It was further observed that since the expenditure on interest is higher than the interest income, no interest income augmented the profits of the business which needed to be reduced. Accordingly the claim of the assessee was allowed. By considering ratio of the decision rendered in case of Pink Star (supra), the claim of the assessee under sections 80HHC, 80HH and 80-I was allowed by the Tribunal in the case of Honda Seil Power Products Ltd. (supra). 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-I of the Income-tax Act and I hold accordingly.
THIRD MEMBER ORDER Phool Singh, Judicial Member
1. 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 circumstances of the present case, the assessee is entitled to deduction under section 80-I of the Income-tax Act, 1961 on interest income earned on FDRs ?"
2. Brief facts, giving rise to the controversy are as under :
The assessee-company was found engaged in the manufacture and sale of tube-mill plant equipments. For assessment year 1989-90 the assessee filed return in which claim under section 80-I was also made in respect of interest of Rs. 76,931 and Rs. 1,69,114 on FDRs deposited with the Bank along with other miscellaneous receipts and chit dividends totalling Rs. 2,82,970. The Assessing Officer was of the opinion that assessee was not entitled for deduction under section 80-I in respect of the above amount of Rs. 2,82,970. The assessee preferred appeal before CIT(Appeals) . and it was contended that Assessing Officer was not justified in not considering interest on FDRs amounting to Rs. 76,931 and Rs. 1,69,114 (Total Rs. 2,46,045) while working out the claim for deduction under section 80-I of the Act as that amount of interest was part of business income. The assessee gave out the modus operandi for deposit of the amount in the FDRs. The assessee was booking the orders from different customers and to ensure honouring of the orders, the assessee-company was asking for advance deposit ranging from 20 per cent to 30 per cent of the value of orders booked. The customers for the safety of deposits so made by them were asking the assessee to give bank guarantee of the amount. The assessee approached banks for giving bank guarantee and banks in their turn asked for security in the shape of FDRs. The assessee borrowed funds by raising cash credit limits and out of that assessee deposited in FDRs and bank in turn gave bank guarantee which satisfied the customers. Other type of FDRs were also being deposited by the assessee-company as at the time of supply against orders, customers were paying 90 per cent of supply at the time of despatch and for the release of balance of 10 per cent payment against supply performance, the customers were asking for the bank guarantee. The assessee again approached the bank and bank in turn asked for security in the shape of FDR. The assessee again borrowed funds from banks out of cash credit limits and made deposits of FDRs and against that bank was extending guarantee to the assessee which was being furnished by the assessee to its customers. 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 order discussed the provisions of section 80-I and took note of the expression "any profits and gains derived from an industrial undertaking" and observed that here expression "derived from" is important one and Their Lordships of Apex Court in the case of Sterling Foods (supra) discussed the scope of expression "derived from" and observed that there must be direct nexus between the profits and gains and the industrial undertaking. The learned A.M. further took into consideration the decision of Hon'ble High Court in the case of Ashok Leyland Ltd. (supra) and noted that amount of interest earned on FDRs in the case of the assessee can be termed as "attributable to" - the industrial undertaking but cannot be termed as "derived from" it. Further reliance was placed on the decision of Hon'ble Madras High Court in the case of Fenner (India) Ltd. (supra) which was the case relating to deduction under section 80HH wherein the same expression as used in section 80-I was defined and Their Lordships laid down that 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 20 per cent in the process of computation of the profits and gains of the said industrial undertaking. Accordingly, the learned AM was of the opinion that ratio of the Apex Court in the case of Sterling Foods (supra) was applicable and assessee was not entitled to claim deduction under section 80-I in respect of amount of interest on FDRs.
3. As against it the learned J.M. noted that ratio of decision in the case of Sterling Foods (supra) is not squarely application to the same as facts of that case were different to the facts of the case in hand. The decision of Madras High Court in the case of Fenner India Ltd. (supra) was also discussed which was based on the earlier decision of the same High Court in the case of Pandian Chemicals Ltd. (supra) and the same was also distinguished. The learned J.M. took into consideration the decision of Apex Court in the case of Vellore Electric Corpn. Ltd. (supra) and noted that the decision of Supreme Court is latest one and involved the identical facts as in the case in hand and this decision of Hon'ble Supreme Court was applicable. He also took into consideration the decision relied upon by the learned counsel for the assessee which were not discussed by the learned AM in detail and noted that ITAT Delhi Bench decision in the case of Rajasthan Petro Synthesis Ltd. (supra) is again direct on the point involved. Further reliance was placed on the decision of Dunlop India Ltd.'s case (supra), South India Shipping Corpn. Ltd. 's case (supra) and decision of ITAT Delhi Bench "D" in ITA No. 2404/Delhi/99 for assessment year 1995-96 decided on 24-3-2000 and 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 insisted for bank guarantee and assessee after borrowing funds from banks was fulfilling the requirement of the customers by submitting bank guarantee, against such FDRs. In the same way the customers were making payments to the extent of 90 per cent at the time of despatch of supply and for release of 10 per cent of payment against performance of the supplied goods, customers were insisting bank guarantee and assessee after borrowing funds was purchasing FDRs against which banks were extending their guarantee to the customers as required by them. In both the situations the assessee was forced to deposit the amount in FDRs at the insistance of the customers. It is peculiar situation as it is not like that assessee was depositing the amount in FDRs at its own volition but assessee company was forced to deposit the borrowed funds in the FDRs for the satisfaction of its customers as they were adamant not to deposit the amount of advance in the absence of such FDRs as well as to release 10 per cent of the amount of purchase against security of performance of the purchased goods unless and until bank guarantee of the said amount was not extended to them. In other words the assessee was obliged to deposit the amount in FDRs to run the business smoothly viz., without losing its customers. Under these circumstances the deposit of the amount in FDRs was sine qua non to run the business.
5. Now comes the claim of the assessee under section 80-I and for that I am reproducing the section which was in existence at the relevant assessment year and it reads as under:
"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 (or the business of repairs to ocean-going vessels or other powered craft), to which this section applies, 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:
6. It is relevant to point out at the very beginning that it was section 80E which was replaced by section 80-I in which initially deduction was allowed out of profits and gains attributable to priority industries. This section was also deleted from 1-4-1973 and the present section as reproduced above was brought on statute 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 there 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 disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression "derived from", as, for instance, in section 80J. In our view, since the expression of wider import namely, "attributable to", has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity,"
8. Further the expression "derived from" has been discussed in the case of Sterling Foods v. CIT[1984] 150 ITR 292. Their Lordships observed that the expression "derived from" has a definite but narrow meaning and it cannot be the flexible or of wider concept.
9. Again in the case of Ashok Leyland Ltd. (supra) Their Lordships of Apex Court had again reiterated the same view as laid down in the case of Cambay Electric Supply Industrial Co. Ltd. (supra).
10. The above criteria laid down by Their Lordships in the above referred to case had been the very foundation on which different courts have scrutinised the claim of different assessees for adjudication under different sections of the Act in the case of Dunlop India Ltd. (supra) the Hon'ble Calcutta High Court while examining the case of the assessee under section 80-I as it was existing in assessment year 1972-73, had an occasion to decide as to whether deposits in the form of Government securities to obtain manufacturing facilities and industrial power connection was eligible for special deduction or not. Their Lordships decided the issue in favour of assessee after noting that if securities had to be furnished for the purpose of carrying on the business of the priority industries then interest receipts earned from the securities will have to be treated as part of the profits and gains attributable to priority industries. Another decision of Hon'ble Supreme Court in the case of Vellore Electric Corpn. Ltd. (supra) is again on the same point in which Their Lordships 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 of Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) 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. (supra) 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. Their Lordships have further opined that mere fact that interest amount was assessable as business income itself, would not be sufficient. Unless the source of the profit is the undertaking, assessee is not eligible to claim deduction and there were no compelling reasons to give wider meaning to the expression "derived from" in section 80HH to cover every receipt. Their Lordships of the same High Court have followed the above ratio in the case of Fenner (India) Ltd. (supra).
12 Their Lordships of the Hon'ble Supreme Court in the case of Sterling Foods (supra) were again seized with the same expression "derived from" used in section 80HH. Their Lordships after taking into consideration the decision of Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), decided the controversy in respect of the claim of the assessee under section 80HH on the profits earned from sale of import entitlement against the assessee after noting as under :
"We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements 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 is not direct but only incidental. The industrial undertaking exports processed sea food. But reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking."
13. Further, as referred to by the learned counsel for the assessee there is the decision of Bombay High Court in the case of CIT v. Nagpur Engg. Co. Ltd. [2000] 245 ITR 806 in which assessee preferred claim for deduction under sections 80HHC and 80-I on interest earned from fixed deposit and Their Lordships noted that Tribunal was justified in directing the Assessing Officer to treat the interest income from deposit as eligible profits of the business while computing the deduction under sections 80HHC and 80-I of the Act. Their Lordships followed the ratio of decision in the case of 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. (supra) stands dismissed by the Apex Court as in 244 ITR (St.) 54.
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. (supra) 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. Co. Ltd. (supra) and as discussed above, SLP of the Department stands rejected.
16. In view of the legal position as emerging from the case law, referred to above, it is to be noted that interest income earned by the assessee on the FDRs in the circumstances narrated above are to be treated as business income of the assessee in view of the direct decision of Hon'ble Bombay High Court in the case of Paramount Premises (P.) Ltd (supra) and even SLP against that decision preferred by the Department stands dismissed. No doubt there is a contrary decision rendered by Hon'ble Madras High Court in the case of South India Shipping Corpn. Ltd v. CIT [1999] 240 ITR 24 in which Their Lordships after following the ratio of decision in the case of Tuticorin Alkali, Chemicals & Fertilizers Ltd. (supra) took a decision that interest income from short term bank deposit will not be business income but income from other sources. However, this decision was rendered on 9-2-1998 and Their Lordships of Madras High Court had no occasion to go through the reasoning of Apex Court in the case of Bakaro Steels Ltd (supra) which was rendered on 18-12-1998 in which Their Lordships have taken a different view than to the decision in the case of Tuticorin Alkali, Chemicals & Fertilizers Ltd. (supra) and laid down that if interest income is in extricably linked with the setting of the capital structure of the assessee-company they must, therefore, be viewed as capital receipt going to reduce the cost of construction. Had latest decision of Apex Court being considered, decision would might be different in the case of South India Shipping Corpn. Ltd. (supra) but it is also settled preposition of law that if there are two views on a particular point rendered by two different High Courts then the view which is favourable to the assessee should be preferred and in this case direct decision of Hon'ble Bombay High Court in the case of Paramount Premises (P.) Ltd. (supra) is there and I have no option but to follow that favourable view and conclude that income so earned by the assessee as interest on FDRs was business income.
17. Once it is concluded that income earned on FDRs was business income and keeping in view the circumstances in which assessee was forced to purchase FDRs after raising funds and even had paid Rs. 6.57 lakhs as amount of interest on borrowed funds to banks, the point for scrutiny is as to whether such interest income is to be treated 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. (supra) 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 undertaking would not be sufficient. There are no compelling reasons to give a voider meaning to the expression 'derived from' in section 80HH, as the nature of the provision, intended to give tax deduction, does not warrant a wider meaning being given to the expression 'derive from' in section 80HH."'[Emphasis supplied]
19. The under-lined observations of Their Lordships are very significant and it gives a scope for the courts to examine the case of each assessee and if there are compelling reasons to give a wider meaning to the expression "derived from" in section 80HH then it can be looked into and Their Lordships in that case did not favour to go ahead to give wider meaning to the said expression. Not only this in the decision of Apex Court in the case of Sterling Foods (supra). Their Lordships have also specifically mentioned that there must be a direct nexus between the profits and gains and the industrial undertaking. If we examine the case of the assessee in view of observation of Their Lordships of Madras High Court as well as Apex Court in the case referred to above then it is abundantly clear that there had been direct nexus between the profits and gains viz., interest income on the FDRs and the industrial undertaking. As narrated in detail assessee was a manufacturer and getting advances from 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 could not have been imagined without purchase of these FDRs as these were inextricably linked with day-to-day business. The FDRs also provided security to the parties and also created the rights and obligations for both the sides. In these circumstances when those FDRs were integral part of the business activities of the assessee then interest earned on such FDRs cannot be excluded from the scope of industrial undertaking. It is also to be noted 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. (supra) 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 case in hand assessee would not have gone ahead with manufacture and sale of tube mill plant equipments in the absence of such FDRs which was so inter-woven in the carrying on of the business of the assessee. So the interest on FDRs was inter connected and having direct nexus with the industrial undertaking of the assessee and such interest income is to be treated as "derived from" from the said undertaking and assessee is entitled to claim benefit under section 80-I of the Act.
20. Lastly it is to be noted that it is not a case of mere earning of interest but it was a case of netting of two interest done by the assessee. It is not disputed from the learned D.R. that assessee had borrowed funds from banks and paid interest at Rs. 6.56 lakhs. The assessee had earned interest on such FDRs to the extent of Rs. 2,46,045. If analogy as taken by the learned AM and argued by learned D.R. is applied that this amount of interest of Rs. 2,46,045 is not derived from industrial undertaking then expenses of Rs. 6.56 lakhs paid by the assessee on borrowed funds was not to be attributable to the industrial undertaking and then such amount shall naturally increase the income of the assessee to that extent which will be higher than to the amount of interest earned on FDRs and claimed as deduction under section 80-I Here it is a case of netting of two interest that the assessee had already netted and net amount was shown in the P&L A/c. The claim of the assessee was also allowable in this manner as appreciated by the learned JM.
On the basis of discussion referred to above and under the facts and circumstances I am of the considered view that assessee was entitled for deduction under section 80-I in respect of interest income earned on FDRs as that amount of interest was derived from the industrial undertaking. Accordingly, I concur with the finding recorded by the learned J.M. The matter shall now go to the regular Bench for necessary action.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 R.S. Syal, Accountant Member
1. In conformity with the opinion of the majority of the Members of the Income Tax Appellate Tribunal, who have heard this case, for the reasons stated in the orders, we adjudicate the issue apropos the point of difference in favour of the assessee.
2. In the result, the appeal of the revenue stands dismissed.