Madras High Court
Commissioner Of Income-Tax vs Rane (Madras) Ltd. on 3 February, 1998
Equivalent citations: [1999]238ITR377(MAD)
JUDGMENT N.V. Balasubramanian, J.
1. In pursuance of the directions of this court in T.C.P. Nos. 285 to 292 of 1982 dated January 9, 1984, the Appellate Tribunal has referred the following common question of law for the assessment years 1966-67, 1967-68, 1968-69, 1969-70, 1970-71 and 1971-72 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the receipts on account of selling agency commission, receipts from job works, interest on deposits and exchange fluctuations on forward contract should be taken into account as receipts attributable to priority industry for allowing relief under Section 80E/80-I of the Income-tax Act, 1961 ?".
2. The assessee is a company engaged in the manufacture of tie rods and clutches, viz., automobile parts. There is no dispute that the assessee is a priority industry. For the assessment years 1966-67 to 1971-72, the assessee, inter alia, claimed relief under Sections 80E and 80-I of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), in respect of the following receipts : (i) selling agency commission ; (ii) receipts from job work ; (iii) interest on deposits ; and (iv) receipts by way of exchange fluctuations on forward contract. The Income-tax Officer for the assessment year 1966-67 to 1970-71 granted the relief under Sections 80E and 80-1 of the Act in the original assessment, but later on passed an order under Section 154 of the Act and disallowed the claim of the assessee. Similarly, for the assessment year 1971-72, the Income-tax Officer did not grant the relief under Sections 80E and 80-I of the Act in the original assessment made by him for the same reasons. The Commissioner of Income-tax (Appeals), on appeals preferred by the assessee, went into the matter in detail, and came to the conclusion that the assessee was entitled to the relief under sections 80E and 80-I of the Act in respect of the receipts by way of selling agency commission, job work, interest on deposits and exchange fluctuations on forward contract. The view of the Commissioner (Appeals) was upheld by the Income-tax Appellate Tribunal and the order of the Appellate Tribunal is the subject-matter of present tax case references on the basis of the directions of this court.
3. We will consider the items of dispute seriatim. We have already seen that the assessee is a company engaged in the manufacture of tie rods and clutches being the automobile parts and there is no doubt that the assessee is a priority industry. The assessee claimed relief under Section 80E of the Act for the assessment years 1966-67 to 1970-71 and for the assessment year 1971-72, the assessee claimed the relief under Section 80-I of the Act. In so far as the first item of dispute, viz., commission received by the selling agent is concerned, it was found that the assessee was the selling agent of the product of Engine Valves Ltd. The Appellate Tribunal held that the assessee was the selling agent of Engine Valves Ltd. and the selling agency business of the assessee was a part of the business activities of the assessee and the selling agency commission was attributable to the priority industries on the ground that the assessee had sold the products of Engine Valves Ltd. and received commission as part of its business income. The Appellate Tribunal, therefore, held that the commission receipts of the ass,essee are attributable to the priority industries.
4. Mr. C.V. Rajan,; learned counsel for the Revenue, submitted that the commission is not attributable to priority industries and the commission was received by the assessee as an agent of Engine Valves Ltd. for the sale of the products of another company. He submitted that though the agency commission might have been assessed under the head "Business" it cannot he said, by any stretch of imagination, that the commission represented profits and gains derived by the priority industries. Section 80E of the Act grants deduction in respect of profits and gains for specific industries in case of certain companies and the crucial words for the purpose of grant of deduction are as under : "Profits and gains" is attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the -articles or things specified in the list in the Fifth Schedule. So, the assessee should establish that the, profits and gains on which relief was claimed were attributable to priority industries. In this case, the assessee received selling agency commission for the sale of the products manufactured by another company called Engine Valves Ltd., and we are of the opinion that the commission received by the assessee was attributable to its agency business and it is not attributable to, the priority industry carried on by the assessee, viz., manufacture of tie rods and clutches. The contention of Mr. Janarthana Raja, learned counsel for the assessee, was that Engine Valves Ltd. is a priority industry and since the assessee sold the product manufactured by Engine Valves Ltd., the assessee would be entitled to the relief under Sections 80E and 80-I of the Act. We are of the opinion that mere fact that the assessee sold the product; manufactured by a priority industry would not entitle the assessee to claim relief under Sections 80E and 80-I of the Act. Engine Valves Ltd. who manufactured the product might have been entitled to the relief under Sections 80E and 80-I of the Act, but that is a different matter and in so far as the assessee is concerned, the assessee received the commission on the sale of another Company's products and the commission was received by the assessee as ah agent, but that would not satisfy the requirements of Sections 80E and 80-I of the Act to hold that the commission was attributable to the priority, industry carried on by the assessee. We are, therefore, of the opinion that the commission received by the assessee did not flow from the assessee's business in its priority sector, but from an agreement on the basis of which it acted as an agent of another company. It is, no doubt, true that the income from the agency business was assessed under the head "Business" along with other business income, but that would not be sufficient to hold that the selling agency commission was attributable to the priority industry. We are of the opinion, the Tribunal was not correct in holding that the selling agency commission received by the assessee as a selling agent of a product of another priority industry should be regarded as profits and gains attributable to the priority industry carried on by the assessee.
5. The next item with which we are concerned is job work receipts. The finding of the Appellate Tribunal is clear that the job work was carried on in the course of manufacture of its products. It is also seen that the same machineries were employed in doing the job works and the assessed was regularly engaged in job works, We are of the opinion, there is nexus or connection between the job works carried on by the assessee and the priority industry of the assessee. We are of the opinion that on the amount received by way of receipts from the job works, the assessee is entitled to the relief under Sections 80E and 80-I of the Act.
6. The next item with which we are concerned is interest on deposits. The assessee had shown under the head "Interest on deposits", several receipts consisting of interest received from the customers for delayed payments or on the temporary banking of the surplus funds or on cash sundry deposits for obtaining electricity connection or such other business realisation. In so far as the interest received by the assessee from the customers for delayed payments is concerned, we are of the opinion that the assessee is entitled to claim deduction under Sections 80E and 80-I of the Act. The assessee sold the goods on credit and for the delayed payment of the sale consideration, as a part of the sale proceeds, the assessee received the interest from the customers for delayed payment of price. We are, therefore, of the opinion, there is a close nexus between the interest on delayed payments and the receipts from the job works carried on by the assessee and to that extent, the assessee is entitled to claim deduction under Sections 80E and 80-I of the Act.
7. In so far as interest on deposits made by the assessee for obtaining electricity connection is concerned, the position is well settled by the decision of this court in CIT v. Seshasayee Paper and Board Ltd., [1994] 207 ITR 80 wherein this court held that in so far as the interest received by the assessee on the deposit kept with the Electricity Board is concerned, the relief would be admissible under Section 80-I of the Act. Following the decision of this court in Seshasayee Paper and Board Ltd.'s case, [1994] 207 ITR 80, the assessee is entitled to deduction under Sections 80E and 80-I of the Act towards the interest on the deposits with the Electricity Board.
8. In so far as other interest receipts, viz., interest received on temporary deposits of unutilised bank credit, interest on chit deposits and interest on advance tax are concerned, we are of the opinion that the interest receipts received are general in nature and they cannot be regarded as in any way attributable to priority industries. Mr. Janarthana Raja, learned counsel for the assessee, submitted that the assessee kept only the surplus business money in the bank and, therefore, on the interest received on the surplus money kept in the bank, the assessee would be entitled to the relief under Sections 80E and 80-I of the Act. He distinguished the earlier decision of this court in English Electric Co. of India Ltd. v. CIT, [1987] 168 ITR 513 on the ground, that in that case the money was kept in fixed deposit in the bank either as a security or for a fixed term and the case dealing with the fixed deposit would stand on a different footing from the surplus business income kept in a bank for a short duration. He, therefore, submitted that the interest would partake of the character of business income and it was assessed under the head, "Business" and, therefore, the assessee would be entitled to the relief under Sections 80E and 80-I of the Act.
9. We are of the opinion, where the interest is earned on the surplus money kept in the bank, it cannot be stated that the interest received is attributable to priority industries. It is, no doubt, true that the interest might have been assessed under the head "Profits and gains" from business, but as laid down by this court in English Electric Co. of India Ltd. v. CIT, [1987] 168 ITR 513 there must be a nexus or connection between the business of the priority industries and the interest receipts. It is true that the expression, "attributable to" as employed has wider connotation, but where the surplus business receipts are kept in a bank, it is not in any way connected with priority industries. We are of the opinion that the interest receipts obtained on such short-term deposits would not be attributable to the priority industries as the source of the receipts is the deposits. We are of the view that such receipts are general in nature and cannot be attributed to the priority industries carried on by the assessee. Therefore, we are of the opinion, the principles of English Electric Co. of India Ltd. 's case, [1987] 168 ITR 513 (Mad) would apply to the interest received from surplus funds kept in the bank, interest received on chit deposits and interest received on advance tax. In so far as these amounts are concerned, the assessee is not entitled to the deduction under Sections 80E and 80-I of the Act, and in respect of other interest receipts the assessee would be entitled to the relief under Sections 80E and 80-I of the Act.
10. The next item with which we are concerned is the receipts arising on account of the exchange fluctuation due to forward contract entered into by the assessee. The Tribunal has recorded a finding that the assessee entered into a forward contract with some foreigners and due to different exchange rates, certain amounts were received by the assessee during different years. The Tribunal also found that the forward contract had a nexus with the goods sold by the assessee. Since the finding of the Appellate Tribunal is that with reference to the goods sold by the assessee, the assessee received certain amounts on account of exchange fluctuation, we are of the opinion that the assessee is entitled to the deduction under Sections 80E and 80-I of the Act on account of receipts towards exchange fluctuation. We are of the opinion that the assessee had received a higher price than that originally due under the contract and it is clearly attributable to the priority industry carried on by the assessee. We are, therefore, of the opinion that the Tribunal was correct in holding that the assessee was entitled to the relief on receipts arising from exchange fluctuation under Sections 80E and 80-I of the Act.
11. Accordingly, we answer the common question of law referred to us as under : In respect of the receipts from job works, exchange fluctuation on forward contract entered into by the assessee, interest on deposits for obtaining electricity connection and the interest received from the customers for delayed payments, the assessee would be entitled to the relief under Sections 80E and 80-I of the Act and in respect of other interest, receipts on deposits and also on selling agency commission received by the assessee, the assessee is not entitled to the deduction under Sections 80E and 80-I of the Act. There will be no order as to costs.