Income Tax Appellate Tribunal - Amritsar
Assistant Commissioner Of Income Tax vs Sutlej Motors Ltd. on 2 March, 2007
Equivalent citations: (2007)112CTR(ASR)874
ORDER
Joginder Pall, A.M.
1. These four appeals have been filed by Revenue against four orders of CIT(A), Jalandhar, for the asst. yrs. 1998-99 to 2001-2002. Since, the issue involved in the appeals is identical, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The only common effective issue raised in all the appeals for all the assessment years is as under:
That on the facts and in the circumstances of the case, the learned CIT(A) has erred in law in allowing deduction under Section 80-IA of the IT Act on interest on FDRs without appreciating the facts that, if at all it was business income, it could not be said to have been derived from the 'industrial undertaking'.
3. The facts common to all the appeals are that in the returns of income filed for all the assessment years, the assessee had claimed deduction under Section 80- IA, which included interest on FDRs as profit derived from an industrial undertaking. The AO observed that interest on FDRs was not a profit derived from an industrial undertaking and, therefore, the assessee was not entitled to deduction under Section 80-IA in respect of the same. The AO relied on the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT , where it was held that interest earned on deposits with the electricity board for supply of electricity to the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was, therefore, not profits or gains derived from undertaking for the purpose of special deduction under Section 80HH. The wording of Section 80HH is similar to the wording of Section 80-IA. The judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT relied upon by the assessee during the course of assessment proceedings was found distinguishable inasmuch as the Hon'ble Supreme Court had not considered the expression 'derived from'. Further, the assessee had also relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Paramount Premises (P) Ltd. . However, the AO observed that the facts of the present case were different from that of CIT v. Paramount Premises (P) Ltd. (supra) inasmuch as in that case, assessee was found engaged in the activities of charging interest on delayed payment of instalments for sale of flats. On these facts, it was held that such activities formed part of business activities. But in the present case, interest accrued on the FDR was no where related to the normal activities of an industrial undertaking because there was no direct nexus between the activities of an industrial undertaking and parking of funds in the FDRs. Thus, the AO reduced the deduction under Section 80-IA by excluding the amount of interest on FDRs.
4. Being aggrieved, the assessee filed the appeals before the CIT(A). It was argued before the CIT(A) that similar issue was decided by the CIT(A) in favour of the assessee and against the Revenue for the asst. yrs. 1991-92 to 1994-95. Therefore, the assessee should be allowed deduction under Section 80-IA in respect of interest on FDRs for the assessment years as well. The AO in his counter comments supported the order of AO by relying on the judgments of Hon'ble Supreme Court in the case of CIT v. Sterling Foods , Nanji Topanbhai & Co. v. Asstt. CIT and Fenner (India) Ltd. v. CIT (2000) 160 CTR (Mad) 141. The learned CIT(A) by relying on the order in the case of Sutlej Coach Builders for the asst. yrs. 1991-92 to 1994-95 allowed the claim of the assessee by recording following identical findings in the impugned order for the asst. yr. 1998-99 which was followed for the subsequent assessment years:
I have considered the submissions from both the sides in the light of the order of my predecessor dt. 15th July, 2004 (supra) and find that decisions relied upon by the AO as well as by the appellant were duly considered and discussed in the said appellate order wherein it was concluded that the deduction claimed under Section 80-IA of the IT Act is allowable to the assessee. During the course of appellate proceedings, the AO placed reliance on certain decisions and I find that the appellant has duly pointed out as to why the said decisions does not help the case of the AO. I further find that the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Isher Dass Mahajan & Sons (supra) further goes to support the case of the appellant. The interest on FDRs not a case of idle funds, was relatable to the running of business as these were used for availing the credit facilities from the bank. It was not pointed out as to how the commission income gets relatable to the business of the appellant reflected as business income. Therefore, following the decision of my predecessor in part and following the broader interpretation of the term 'profits' in relation to eligible business as given in the case of Apollo Tyres Ltd.; I hold that the deduction as claimed by the assessee under Section 80-IA is allowable with reference to interest income and the grounds taken in this regard are partly allowed.
5. The Revenue is aggrieved by the orders of the CIT(A). Hence, these appeals before this Bench.
6. The learned Departmental Representative, Sh. Tarsem Lal, relied on the o decision of Tribunal, Amritsar Bench dt. 25th Aug., 2006 in the case of Chaman Lal Setia Exports Ltd. v. Addl. CIT Range-V, Amritsar in ITA No. 502/Asr/2004 for the asst. yr. 2001-2002.
7. The learned Counsel for the assessee, Sh. S.S. Kalra, has sent written submissions vide letter dt. 1st Feb., 2007 stating therein that similar issue was decided in favour of the assessee by the CIT(A) for the asst. yrs. 1991-92 to 1994-95 in the case of Sutlej Coach Builders (P) Ltd. and the Department has not filed any appeal against the said order of the CIT(A). Thus, the learned Authorised Representative has pleaded that principle of consistency deserved to be followed. He relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Vikas Chemi Gum India (2005) 196 CTR (P&H) 123. He also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Dalmia Promoters Developers (P) Ltd. (2006) 200 CTR (Del) 426. As regards the reliance of the Department on the judgments of Hon'ble Supreme Court in the cases of CIT v. Sterling Foods (supra), Pandian Chemicals Ltd. v. CIT (supra) and the decision of Tribunal, Special Bench in the case of Nirma Industries Ltd. v. Asstt. CIT (2005) 95 ITJ (Ahd)(SB) 867, the learned Counsel has stated that while deciding these matters, the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra) has not been taken into account. He also relied on the decision of Bombay High Court in the case of CIT v. Nagpur Engineering Co. Ltd. and the judgment of Hon'ble Punjab & Haryana High Court in the case of CLT v. Isher Dass Mahajan & Sons (2001) 170 CTR (P&H) 271. Thus, he contended that the impugned orders of the CIT(A) did not merit any interference.
8. We have heard the learned Departmental Representative and carefully considered his submissions as well as written submissions of the learned Authorised Representative, examined the facts, evidence and material placed on record, The undisputed facts of the case are that the assessee had claimed deduction under Section 80-IA by including interest on fixed deposits as profit derived from an industrial undertaking. The AO has mentioned in the assessment orders that the assessee has been parking funds in the fixed deposits from year to year and earning interest on FDRs and such activity had nothing to do with the business activities of an industrial undertaking. Section 80-IA of the Act provides deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development. This deduction is admissible in a case where gross total income of an assessee includes any profits or gains derived by an undertaking or an enterprise from any business referred to in Sub-seciton (4) of the said section. The deduction is admissible in the manner provided under Sub-section (2) of the said section subject to the conditions stipulated under Sub-section (3) of Section 80-IA. There is no dispute about the fact that the assessee is an industrial undertaking entitled to deduction under Section 80-IA. The only dispute relates to whether interest earned on FDRs constitutes a profit derived from an industrial undertaking for the purpose of deduction under Section 80-IA. The expression "derived from" came to be considered by the Hon'ble Supreme Court in the case of CIT v. Sterling Foods (supra), where it was held that there must be a direct nexus between the profits and gains and the industrial undertaking. In a case where the nexus was not direct but only incidental, the assessee would not be entitled to deduction under Section 80HH similar to Section 80-IA. The Hon'ble Supreme Court held that profit from a import entitlements could not constitute to profits and gains derived from an industrial undertaking and, therefore, the assessee was not entitled to deduction under Section 80HH.: The Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT (supra) again considered the expression "derived from". In that case, the assessee had earned interest on deposits made with the electricity board for supply of electricity to an industrial undertaking. The Hon'ble Supreme Court held that although electricity may be required for the purposes of an industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking as the same could not be said to be flow directly from the industrial undertaking itself and no profits or gains derived from the undertaking for the purpose of special deduction under Section 80HH. While taking such view, the Hon'ble Supreme Court relied on the judgment of Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh and Ors. (1948) 16 ITR 325 (PC) and its own judgment in the case of Mrs. Bacha F. Guzdar v. CIT (1955) 27 ITR 1 (SC). When we apply the ratio of this judgment to the facts of the present case, we find that interest on FDRs on the surplus funds from business invested therein would not constitute a profit derived from an industrial undertaking. Even if, it is held that the assessee had kept FDRs as security for obtaining loans, the same would again not constitute profit derived from an industrial undertaking and this position has been conceded by the assessee in the written submissions also. Besides, the decision of the Tribunal, Special Bench, in the case of Nirma Industries Ltd. v. Asstt. CIT (supra) is directly on the issue wherein it has been held that interest on FDRs does not qualify for deduction under Section 80-IA. The only point made by the learned Authorised Representative is that while deciding the above cases, the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra) has not been considered. We have referred to the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra) which is clearly distinguishable on facts. The issue raised before the Hon'ble Supreme Court was whether the dividend income earned by the assessee company from its investment made in the Unit Trust of India could be included in computing the profit of the eligible business under Section 32AB of the IT Act. The facts of that case were that apart from manufacture and sale of tyres, the business of the assessee also included purchase and sale of units of the Unit Trust of India and both the businesses were interconnected, interwined and interlaced and, therefore, the business in purchase and sale of units was held to be a profit from eligible business within the meaning of eligible business for the purpose of deduction under Section 32AB of the Act. Section 32AB as it stood at the relevant time allowed deduction to an assessee whose total income include income chargeable to tax under the head "Profits and gains of business or profession" and had out of such income utilized any amount during the previous, year for the purchase of new plant and machinery or deposited the amount in an account maintained with the development bank, the deduction was to be allowed @ 20 per cent of the profit of such business as computed in the accounts of the assessee. Thus, it is obvious that the activities of purchase and sale of units were considered to be integral part of the business activity of the assessee. Accordingly, it was held that dividends on units of UTI constituted part of business' profit from eligible business. The issue before the Hon'ble Supreme Court was whether, the profit from purchase and sale of units which formed integral part of the business could be considered for the purpose of deduction under Section 32AB. These are not the facts of the present case. The assessee is not engaged in the money lending business. It is also not the business of the assessee to borrow funds and invest in the FDRs. In other, words, the amounts invested in FDRs do not form part of regular business activity of the assessee as found in the case of Apollo Tyres (supra). Therefore, in our humble view, the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIF (supra) is not applicable to the facts of the present case. On the other hand, the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CLT (supra) is directly on the issue and is also later in time. Besides, the said, judgment related to deduction under Section 80HH, which is a similar to Section 80-IA. Now if the interest on deposit with electricity board for supply of electricity to an industrial undertaking has not been found to be profit derived from an industrial undertaking, how could the interest on fixed deposits in the bank could be treated as profit derived from an industrial undertaking entitled to deduction under Section 80-IA. Moreover, for the purpose of deduction under Section 80-IA, the nexus of profit should be direct with the activities of an industrial undertaking and not incidental. What is required to be established is that the profit should, be derived from an industrial undertaking and not merely business profit. Therefore, reliance of the learned Authorised Representative on the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra) is of no help to the assessee.
9. The learned Authorised Representative has also relied on the principle of consistency and has submitted that similar view was taken by the learned CIT(A) in the case of Suite Coach Builders (P) Ltd. for the asst. yrs. 1991-92 to 1994-95 and no appeal was filed by the Revenue. A copy of the order of the CIT(A) is placed on our record. However, a copy of the assessment order has not been placed on our file. A perusal of the same shows that in the first appeal, the learned CIT(A) upheld the action of the AO. However, the order of the CIT(A) was set aside with the direction that the manner in which interest income was earned should be brought on record. A perusal of the order of the CIT(A) does not show in any manner that whether the directions of the Tribunal were taken into account. The learned CIT(A) by merely relying on the submissions of the assessee and the judgment of Bombay High Court in the case of CIT v. Nagpur Engineering Co. Ltd. (supra) and the judgment of apex Court in the case of Apollo Tyres Ltd. v. CIT (supra) allowed the appeal of the assessee. We have already distinguished the facts of the case in Apollo Tyres Ltd. v. CIT (supra) from the facts of the present case and held that the said judgment is not applicable to the facts of the present case. As regards the judgment of Hon'ble Bombay High Court in the case of CIT v. Nagpur Engineering Co. Ltd. the sameis based on the judgment of CIT v. Paramount Premises (P) Ltd. (supra). Obviously in the case of CIT v. Paramount Premises (P) Ltd. the Hon'ble Bombay High Court did not have the benefit of Supreme Court judgment in the case of Sterling Foods v. CIT (supra) and Pandian Chemicals Ltd. v. CIT (supra). The issue before the Bombay High Court in the case of CIT v. Paramount Premises (P) Ltd. (supra) was whether interest' received on deposits on late instalments from prospective purchasers formed part of the business activities. The Hon'ble Bombay High Court was not considering the issue regarding interest on FDRs earned on surplus funds invested in the banks for the purpose of allowing deduction under Section 80-IA. The interest was earned on the late payments of deposits as part of the business activity. Therefore, the judgment of Hon'ble Bombay High Court in the above case was on its own facts and in any case even, subsequently, the Hon'ble Bombay High Court in the case of CIT v. Nagpur Engineering Co. Ltd. (supra) did not have the benefit of referring to subsequent judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT (supra) Which is direct on the issue. The learned CIT(A) has not given any valid reasons why this judgment of Supreme Court was not applicable to the facts of the present case. Further, we have noted two judgments of jurisdictional High Court discussed in the succeeding paragraphs where the Hon'ble High Court by relying on the judgments of Supreme Court in the cases of CIT v. Sterling Foods (supra) and Pandian Chemicals Ltd. v. CIT (supra) has held that income, by way of duty drawback and from purchase and sale of goods manufactured by other concerns, was not a profit derived from an industrial undertaking and hence, not entitled to deduction under Section 80-IA. The judgments of Supreme Court and of jurisdictional High Court are binding and, therefore, cannot be ignored for the sake of consistency.
10. We also wish to mention that recently Tribunal, Special Bench Delhi in the case of Dy. CIT v. Allied Construction (2007) 106 TTJ (Del)(SB) 595 has considered the issue of interest on fixed deposits offered as security for various facilities availed -by the assessee carrying on business of building contractor. The facts of that case were that the assessee had taken loan by pledging fixed deposits as security. The assessee claimed that interest earned on FDRs formed part of the contract business. However, the stand of the Department was that interest earned on FDRs was to be assessed as "income from other sources" and not as 'business profit' The Special Bench of Tribunal after relying upon the judgment of Hon'ble Supreme Court in the cases of Pandian Chemicals Ltd. v. CIT (supra) and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT and the judgment of Privy Council in the. case of CIT v. Raja Bahadur Kamakhaya Narayan Singh and Ors. (supra) has held that interest income from FDRs was to be assessed under the head "Income from other sources" and not as part of the contract business. The Tribunal, further, held that it could not be said that interest paid to the bank was incurred for the purpose of earning interest income on FDRs and, therefore, it could not be allowed as deduction. Thus, netting of interest was not allowed. Now, if the interest income on the FDRs offered as security for various facilities availed by the assessee was held to be 'income from other sources', how could the same be held as profit derived from an industrial undertaking entitled to deduction under Section 80-IA.
11. The learned Authorised Representative has relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Ishei Dass Mahajan & Sons (supra) where it was held that interest on FDRs being incidental to the normal business activity of assessee, the same qualified for deduction under Section 80HHC. This judgment is not applicable to deduction under Section 80-IA for the simple reason that for the purpose of deduction under this section the profit must be derived from an industrial undertaking, which means there must be direct nexus between the profit and the industrial undertaking. The mere fact that such activity is incidental to business is not enough. Moreover, the judgment of Hon'ble Punjab & Haryana High Court is with reference to provisions of Section 80HHC and not Section 80-IA. Section 80HHC is materially different from Section 80-I. Further, it is dt. 16th July, 2001. The judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT (supra) is dt. 24th April, 2003. Therefore, the Hon'ble Punjab & Haryana High Court had no occasion to refer to such judgment. It may further, be mentioned that Hon'ble Punjab & Haryana High Court in its recent judgment in the case of Liberty India v. CIT (2007) 207 CTR (P&H) 243 by referring to the judgment of Hon'ble Supreme Court in the case of Sterling Foods v. CIT (supra) has held that duty drawback received by the assessee is not a profit derived from an industrial undertaking and, therefore, not entitled to deduction under Section 80-IA. In yet another judgment in the case of Liberty Shoes Ltd. v. CIT (2007) 207 CTR (P&H) 181, the Hon'ble jurisdictional High Court of Punjab & Haryana has held that profit from sale of goods manufactured by other concerns, though business income, was not a profit derived from an industrial undertaking. Hence, assessee was not entitled to deduction under Section 80-IA. Thus, it is clear from these judgments that for the purpose of claiming deduction under Section 80-IA, there must be a direct nexus between the activities of industrial undertaking and the profit derived and such nexus should not be incidental. If the nexus is incidental, such income would not qualify for deduction under Section 80-IA. In this view of the matter, reliance of the assessee on this judgment is of no help.
12. We are not impressed with the submissions of the assessee that amount kept in the FDRs as margin money for obtaining loans constitute profit from an industrial undertaking for the reason that the source of interest is the bank and not the business activities of an industrial undertaking. Further, even if the business of an industrial undertaking is closed, the assessee would continue to earn interest on the FDRs in the bank and such interest income would be taxable under the head Income from other sources". Thus, profit earned from the business activities of an industrial undertaking is independent and not the same thing as interest earned on the FDRs. Similarly, if the surplus funds or profit from the business is invested in the FDRs, the same does not become profit derived from the business simply because funds have been invested from profits of an industrial undertaking. Interest earned on the FDR would be "income from other sources" and not business income because the same does not constitute regular business activity of the assessee. For example in a case where salaried employee saved money and invested in FDRs in the bank, such interest income would be taxable under the head "Income from other sources", even though funds invested in the FDRs were out of savings from salary income. Interest earned would not form part of the salary income of the assessee. Even if the assessee ceased to be an employee, he would still continue to earn interest on FDRs. Thus, both are independent sources of income. We are, therefore, of the considered opinion that interest earned on FDRs in the bank whether kept as a margin money or invested out of surplus funds would be liable to tax under the head "Income from other sources". In any case, the same is not a profit derived from an industrial undertaking.
13. Thus, in the light of these facts and circumstances of the case, the legal position discussed above and by following the ratio of the various judgments referred to above, we hold that the assessee is not entitled to deduction under Section 80-IA in respect of interest on FDRs. Therefore, we set aside the orders of the CIT(A) and restore that of the AO. Accordingly, the grounds of appeals of the Revenue are allowed for all the assessment years.
14. In the result, all the appeals of the Revenue are allowed.