Income Tax Appellate Tribunal - Jabalpur
Deputy Commissioner Of Income Tax vs Vindhya Telelinks Ltd. (Also Vindhya ... on 13 February, 1997
Equivalent citations: [1997]63ITD127(JAB)
ORDER
G.D. Agrawal, A.M.
1. This appeal by the Revenue and cross-objection by assessee are directed against the order of CIT(A), Jabalpur.
ITA No : 704/Jab/91 : Revenue's Appeal :
2. First ground of appeal reads as under :
"1. The learned CIT(A) erred in directing the AO to include the amount of Rs. 15,55,875 representing advance for acquisition of machinery for the purpose of computation under s. 32AB and to recalculate the relief without proper appreciation of complete facts of the case and provisions of law."
3. Facts relating to this ground of appeal are as follows : The assessee is a public limited company. It is engaged in manufacturing and sale of jelly-filled telephone cable. In the return of income the assessee had claimed deduction of Rs. 1,61,49,222 under s. 32AB of the IT Act. The assessee had claimed to have utilised a sum of Rs. 1,63,75,625 for the purpose of s. 32AB. Details of which are as under :
"Part-A Amount utilised Rs. Rs.
Total purchase as per list 83,59,033
Less : Advance considered last year 19,950
Cases where payments for P&M not made 5,19,333 5,39,283
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78,19,750
Add : Advance paid towards purchase of
plant & Machinery 15,55,875
-----------
93,75,625
Add : Deposit with IDBI made vide receipt
No. DB/1.70, dt. 16-5-1989
(evidence on record) 70,00,000
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1,63,75,625
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However, 20 per cent. of profit was worked out at Rs. 1,61,62,646. Hence deduction under s. 32AB was claimed at Rs. 1,61,62,646. The AO found that a sum of Rs. 15,55,875 was paid by the assessee as advance towards purchase of plant and machinery. He was of the opinion that the amount of advance cannot be said to be the "amount utilised" for deduction under s. 32AB. Accordingly, he reduced the sum of Rs. 15,55,875 from amount utilised for the purpose of s. 32AB. On appeal the CIT(A) directed the AO to include the said amount for the purpose of computation under s. 32AB. Hence this appeal by the Revenue.
4. At the time of hearing before us it was submitted by the learned Departmental Representative that deduction under s. 32AB is allowed for the amount utilised for purchase of plant and machinery. That the amount given as an advance cannot be said to be amount utilised for this purpose. The amount remained as an advance only till the plant and machinery is actually purchased. He further submitted that either the assessee may deposit the money with IDBI or may utilise it for actual purchase of machinery. Then only deduction under s. 32AB would be allowed.
5. The learned counsel for the assessee submitted that deduction under s. 32AB is allowed for utilisation of amount for purchase of machinery. In this case the assessee has given the advance for purchase of machinery. Machinery were in fact supplied in subsequent year. He submitted that unlike s. 32A there is no condition for reinstallation or putting into use of the machinery during the year under consideration. For allowability of deduction under s. 32AB main emphasis is on "utilisation of amount" during the year under consideration. Therefore, CIT(A) was fully justified in directing the AO to consider the sum of Rs. 15,55,875 for working out deduction under s. 32AB. In support of his contention he relied upon guidance notes issued by the Institute of Chartered Accountants of India and following decisions of Tribunal :
(i) Reliable Cigarette & Tobacco Industries (P) Ltd. vs. Dy. CIT (1995) 51 TTJ (Ind) 103 and
(ii) C.P. Foundry Works vs. ITO (1995) 53 ITD 176 (Nag).
6. We have carefully considered arguments of both the sides and have perused the material placed before us. During the accounting year relevant to assessment year under consideration, assessee advanced a sum of Rs. 15,55,875 for purchase of following machineries :
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Sl. Supplier Particulars Qty. Amt Payment details No.
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1. ASA Machine Intermediate Wire 2 6,76,500 Ch. No. 255143 Tools, Drawing Machine dt. 28-2-89 Secunderabad.
2. -do- Red Breakdown 1 8,79,375 Ch. No. 355142 Machine dt. 28-3-89
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Total 15,55,875
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It is not in dispute that the above machineries were purchased in the subsequent years. Now the question is whether the advance of Rs. 15,55,875 given during the year under consideration, can be considered as "amount utilised" for the purchase of plant and machinery within the meaning of s. 32AB. Sec. 32AB, as it stood at the relevant time, reads as under :
"32AB (1) Subject to the other provisions of this section, where an assessee whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income :
(a) deposited any amount in an account (hereinafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or
(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under cl. (a), in accordance with and for the purposes specified in, a scheme (hereinafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under s. 72) of :
(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised; or
(ii) a sum equal to twenty per cent of the profits of business on profession as computed in the accounts of the assessee audited in accordance with sub-s. (5), whichever is less."
From the above it is clear that the assessee will be entitled to deduction under s. 32AB provided he either deposits any amount with Development Bank or utilises any amount during the previous year for purchase of any machinery. In the appeal before us, the assessee has advanced a sum of Rs. 15,55,875 and has claimed it as the amount utilised for purchase of machinery. The claim of the Revenue is that unless the machinery is delivered the amount cannot be said to be utilised for purchase of machinery. We are unable to agree with the interpretation put forward by the learned Departmental Representative. From the plain reading of the section it is apparent that the emphasis is on the utilisation of the amount during the previous year. If an advance is given for purchase of machinery during the year the advance is in effect the part payment against the cost of the machinery and, therefore, it is the amount utilised for purchase of machinery. If it would have been the intention of the Parliament that the deduction is to be allowed in the year of acquisition of machinery or installation of machinery the section would have been worded differently. It would not be out of place to mention here that almost similar allowance was allowable under s. 32A of the IT Act as investment allowance. In that section the deduction was permissible in the year in which plant or machinery was installed or it was first put to use. However, s. 32AB, which is introduced later on, has utilised altogether different words and in this section there is no such condition of either installation of the plant and machinery or its utilisation. Therefore, we are of the opinion that the amount advanced for purchase of plant and machinery is the amount utilised for the purpose of s. 32AB(1)(b). It is not in dispute that the machineries were in fact supplied in the subsequent years and the advance of Rs. 15,55,875 was actually adjusted against the cost of such machineries. In view of these facts we find no infirmity in the order of the CIT(A) directing the AO to consider the advance of Rs. 15,55,875 for the purpose of working out deduction under s. 32AB. We may also mention that the Tribunal, Indore Bench in the case of Reliable Cigarette & Tobacco Industries (P) Ltd. (supra) and the Tribunal, Nagpur Bench in the case of C. P. Foundry Works (supra) have taken the similar view. Accordingly, Ground No. 1 of the Revenue's appeal is rejected.
7. Ground No. 2 reads as under :
"2. The learned CIT(A) erred in directing the AO to include the amount of Rs. 10,22,476 representing miscellaneous income of the assessee-company for the purpose of computation of relief under ss. 80HH and 80-I without proper appreciation of complete facts of the case and provisions of law."
The facts in this respect are that the assessee derives income from manufacturing of jelly-filled telephone cable. The assessee is entitled to deduction under ss. 80HH and 80-I. While examining the assessee's claim, the AO found that the assessee has received interest amounting to Rs. 10,66,276 and has included the same in its profit. The details of such interest as given on p. 9 of the assessment order reads as under :
Rs.
(a) Interest on term deposit placed with 2,21,830
nationalised banks
(b) Interest on loan giving to a body corporate 5,95,000
(c) Interest on amount deposited under Investment 1,86,667
Deposit A/c Scheme 1986 with IDBI
(d) Interest received from income-tax authorities 40,811
(e) Interest on security deposit placed with MPEB 19,000
against UT supply to the Co.
(f) Interest on delayed payment of allotment money 2,968
from share-holders
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10,66,276
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He was of the opinion that the interest income cannot be said to be income derived from the industrial undertaking and, therefore, not entitled to deduction under ss. 80HH and 80-I. On appeal before the CIT(A), the assessee conceded that the interest received on income-tax refunds amounting to Rs. 40,811 and interest on delayed payment of allotment money from shareholders amounting to Rs. 2,968 was not income derived from industrial undertaking. In respect of the remaining interest amounting to Rs. 10,22,497, the CIT(A) was of the view that all these receipts arose and emanated from the industrial undertaking itself and not from any other source. He directed the AO to consider the said sum of Rs. 10,22,497 for the purpose of computation of relief under ss. 80HH and 80-I. The Revenue aggrieved with this direction of the CIT(A) is in appeal before us.
8. At the time of hearing before us it is submitted by the learned Departmental Representative that deduction under ss. 80HH and 80-I is allowable in respect of the income derived from an industrial undertaking. Any income can be said to be derived from the industrial undertaking only if it has a direct nexus with such industrial undertaking. In the present case, the interest income received from various sources had no direct nexus with the industrial undertaking and, therefore, cannot be said to be income derived from industrial undertaking. In support of his contention, he relied upon the decision of Hon'ble Karnataka High Court in the case of Sterling Foods vs. CIT (1985) 47 (1984) 150 ITR 292 (Kar). He further submitted that the decision of the Hon'ble Madhya Pradesh High Court in the case of Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. vs. CIT (1984) 143 ITR 590 (MP), has wrongly been applied by the CIT(A).
9. The learned counsel for the assessee submitted that the only source of income of the assessee is this industrial undertaking which is manufacturing jelly-filled telephone cable. The amount deposited for power connection with MPEB or the amount deposited with IDBI for purchase of machinery has a direct nexus with the industrial undertaking of the assessee. Further, the advance of idle money for a temporary period is also income derived from industrial undertaking itself and, therefore, the CIT(A) was perfectly justified in directing the AO to consider the above interest income for the purpose of deduction under ss. 80HH and 80-I. 9.1 He alternatively submitted that the assessee has advanced the above money out of the borrowed funds and, therefore, if at all the interest received on the above deposits is to be excluded, it can be only the net income if any, i.e., the interest received by the assessee should be reduced from the interest payment by the assessee. To strengthen his claim, he pointed out that the assessee has received the total interest of Rs. 10,22,497 while the interest paid by the assessee during the year under consideration was Rs. 1,04,21,647.
10. We have carefully considered the argument of both the sides and have perused the material placed before us. Deduction under ss. 80HH and 80-I is permissible on the profits and gains "derived from" an industrial undertaking. An income can be said to be derived from an industrial undertaking only if it is directly related to the running of the industrial undertaking itself. The scope of the expression "derived from" is much narrower than the expression "attributable to". It may be mentioned that earlier when the deduction for the profit and gains of new industrial undertaking was permissible under s. 80E the expression used was profit and gains "attributable to" the industrial undertaking. While interpreting the meaning of the words "attributable to" their Lordships of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) has observed 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 (here 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 charges 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 s. 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."
Now, under ss. 80HH and 80-I the legislature has used the words "derived from" as against the use of the words "attributable to" in s. 80E. Therefore, it has to be concluded that the legislature intended to give the narrower meaning to the profit of the industrial undertaking. By using the words "derived from" the deduction is restricted to the profits and gains which is arising on running of the industrial undertaking.
10.1 The learned CIT(A) while allowing relief to the assessee has relied upon the decision of the Hon'ble Madhya Pradesh High Court in the case of Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd (supra). It has been contended by the learned Departmental Representative that the CIT(A) has wrongly applied this decision of the Hon'ble Madhya Pradesh High Court.
11. We have carefully gone through the said decision. The facts of the case under reference before the Madhya Pradesh High Court were as follows : The assessee was a company which was deriving income from manufacturing and export of art silk fabrics. The dispute was with regard to the determination of value of the turnover of goods exported. The AO worked out the export turnover as per invoice only and excluded the following items :
(i) Drawback of customs duty,
(ii) Refund of excise duty,
(iii) Value of import entitlements.
The view taken by the AO was upheld by the AAC and the Tribunal. When the matter reached to the Hon'ble High Court it was held that the drawback of the customs duty and the refund of excise duty has a direct relationship with the export business carried on by the assessee and, therefore, it must be held that they are derived from the export business carried on by the assessee and thus form part of the turnover of the export business of the assessee. However, in respect of value of import entitlement the opinion of their Lordships was different. The assessee was allowed to import yarn. The assessee got import licence only because it exported goods. The import licence was transferred by the assessee for a consideration of Rs. 28,81,308. The question was whether the source of such income can be said to be the export business. In other words, whether the income resulting from import entitlements can be said to be profits and gains derived from export business. Their Lordships for interpreting the words "derived from" relied upon the decision of Hon'ble Privy Council in the case of CIT vs. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC). The following observations of the Hon'ble Privy Council as considered by the Hon'ble Madhya Pradesh High Court is reproduced below :
"The word "derived" is not a term of art. Its use in the definition [s. 2(1) of the Indian IT Act, 1922] indeed demand an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest, land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition."
Applying the ratio of above decision to the facts of the case, their Lordships of Madhya Pradesh High Court observed as under :
"Applying the test laid down by the Privy Council, let us examine as to what is the source of the profits resulting from the import entitlements. In the genealogical tree of this income, import comes first and export appears in the second degree. The income arising from import entitlements is directly related to the import activities or the import business of the assessee. It may be that it was because of the export business that the assessee got import licences, yet the connection of the income resulting from import entitlements to the export business is indirect and the direct source of this income is the import business. The amount of Rs. 28,81,308, being profits arising from import entitlements cannot, therefore, be included in the value of the turnover of exports under r. 2(3)."
12. Now let us examine the facts of the case under appeal before us applying the test laid down by the Hon'ble Madhya Pradesh High Court. In the case under consideration before us, the assessee has earned interest income on short-term deposit with bank, loan given to body corporate, deposit with IDBI and security deposit with MPEB. In the genealogical tree of this income direct source of income is the deposit. Even if the deposit was made during the course of running of the industrial undertaking, the interest income cannot be said to be arising out of the running of the industrial undertaking. The industrial undertaking has only indirect relationship with the earning of interest income. In other words, the earning of interest is not related to the running of the industrial undertaking. Therefore, respectfully applying the decision of the Hon'ble Jurisdictional High Court in the case of Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (supra) we hold that the interest income of Rs. 10,22,497 earned by the assessee is not "derived from" industrial undertaking so as to be included in the profits and gains of such industrial undertaking for the purpose of ss. 80HH and 80-I. 12.1 The learned counsel for the assessee has alternatively submitted that the interest income, if at all has to be excluded from the profits and gains of the industrial undertaking, it should be net interest income, i.e., interest received by the assessee reduced by the interest paid. We are in agreement with this submission of the learned counsel for the assessee. From the perusal of the assessment order we find that the similar argument was raised before the AO also but the same was not considered by him. We, therefore, deem it proper to set aside this aspect of the matter to the file of the AO with the direction that he shall verify the interest paid by the assessee on the money borrowed which is utilised for making the deposit/loan under consideration. He shall reduce the interest paid by the assessee on the above borrowings from the interest received by the assessee and shall work out net interest income. Only such net interest income shall be excluded from the profits and gains of the industrial undertaking for the purpose of deduction under ss. 80HH and 80-I.
13. In the result, the Revenue's appeal is deemed to be partly allowed for statistical purposes.
14. The cross-objection filed by the assessee is only in support of the order of the CIT(A). The same being infructuous is dismissed.