Income Tax Appellate Tribunal - Ahmedabad
Inductotherm (India) Ltd. vs Dy. Cit on 13 December, 2001
Equivalent citations: (2002)75TTJ(AHD)728
ORDER
B.M. Kothari, A.M. These cross-appeals by the assessee and by the revenue involve consideration of various common points. Hence these appeals were heard together and are being disposed of by this common order.
2. Shri M.K. Patel, learned advocate appeared on behalf of the assessee. He submitted a chart at p.p. 1 and 2 of the paper book in which a summary of various grounds of appeal raised in assessee's appeal as well as in revenue's appeals has been given.
3. The first common ground as per the aforesaid chart raised in assessee's appeals for assessment years 1989-90 and 1990-91 relates to challenge against reopening of assessments under section 148 particularly on issues not being the subject-matter of notices under section 148. The learned counsel gave the following relevant dates pertaining to assessment years 1989-90 and 1990-91 :
Particulars Asst. yr.
1989-90 Asst. yr. 1990-91
1.
Return filed on 29-12-1989 31-12-1990
2. Processed under section 143(1) Date not mentioned by AR 25-03-1991
3. Original Assessment under section 143(3) N.A. 23-11-1992
4. Notices under section 148 issued 27-01-1994 27-01-1994
5. Return under section 147 filed on 17-3-1994 17-3-1994
6. Return again processed under section 143(1)(a) r/w rule 147 31-3-1994 31-3-1994
7. Regular assessment year under section 147 r/w section 143(3) made on 15-02-1995 15-02-1995 3.1. Shri Patel submitted that no regular assessment was made under section 143(3) for assessment year 1989-90. Only intimation under section 143(1)(a) was issued. However, in assessment year 1990-91, original assessment under section 143(3) was made. He submitted that proceedings under section 147/148 were initiated against the assessee to consider the question relating to admissibility of depreciation on Delhi and Bombay office buildings (which were then disallowed during assessment year 1991-92) on the ground that legal conveyance of these buildings were not completed during the relevant assessment years. The reassessment proceedings under section 148 were taken up with reference to depreciation allowed only and no other issue was mentioned in the reasons recorded under section 147. The assessee's claim in respect of depreciation on office buildings at Bombay and Delhi has been accepted by the assessing officer himself in the reassessments completed under section 147 read with section 143(3) which clearly shows that the reasons on the basis of which proceedings under section 147 were taken did not exist. Shri Patel further drew our attention to original assessment order made under section 143(3) for assessment year 1990-91 a copy whereof has been placed at page 51 of the paper book. The discussions made in the original assessment order were highlighted with a view to show that the assessee's eligibility for grant of deduction, under section 80-I on various items such as interest, etc. and also the question relating to grant of deduction in respect of wealth-tax was specifically discussed or distinctly allowed by way of a separate deduction in the computation of taxable income made in that assessment order. He submitted that various additions and disallowances made in the reassessment, orders were fully and thoroughly discussed and examined during the course of original assessment proceedings and all such additions now made in the reassessment orders are based on mere change of opinion. The reopening of the completed assessments on the basis of mere change of opinion is not valid, says the learned counsel. He relied, on the following judgments :
(A) Garden Silk Mills Ltd. v. CIT (1996) 222 ITR 68 (Guj) :
This case relates to assessment year 1992-93. The completed assessment for assessment year 1992-93, was reopened by issue of notice under section 148, dated 3-2-1995 i.e., within a period of four years from the end of the relevant assessment year. In that case, the assessing officer clearly applied his mind at the time of original assessment with regard to allowability of certain deductions. The assessing officer after taking into consideration various judgments including the judgment of the Supreme Court held that there is no transfer of capital assets on cancellation of forward exchange contracts. Likewise, the assessing officer considered the judgment of the jurisdictional High Court in the case of Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj) and held that there is no difficulty in accepting the assessee's contention relating to grant of deduction of excise duty. On these facts the Hon'ble High Court held that the assessing officer cannot take any action under section 147 of the Act, merely because he happens to change his opinion or to hold an opinion different from that of his predecessor on the same set of facts.
(B) Garden Silk Mills Ltd. v. Dy. CIT (1999) 237 ITR 668 (Guj) :
In this case also the assessee had claimed the amount of customs duty forming part of closing stock value, by way of a deduction in the computation of net taxable income on the ratio in the case of Lakhanpal National Ltd. v. ITO (supra). It was allowed by the assessing officer. The Hon'ble, High Court held that without there being any material before the assessing officer on the basis of which he could held belief about the correctness of the decision rendered in Lakhanpal National Ltd.'s case (supra) which was a decision of the jurisdictional High Court and binding on him otherwise, the assessing officer could not have reason to believe that the income had escaped assessment due to application of Lakhanpal's case by the original assessing officer. The notice issued under section 148 was accordingly held to be invalid.
(C) Sheth Brothers v. Jt. CIT (2001) 251 ITR 270 (Guj) :
This was a case relating to reassessment proceedings initiated under section 147(a) for assessment year 1990-91. The notice under section 148 was issued on 5-2-2001. The assessee had put forth its claim in entirety and supported the same on the basis of circular which formed part of written submissions made before the assessing officer during the course of assessment proceedings which culminated in the assessment order dated 29-11-1994. The assessing officer had also taken note of such written submissions in his assessment order and it could not therefore be stated that there was any non-application of mind on the part of the assessing officer. As the assessment was sought to be reopened after a period of four years and there was admittedly no omission or failure on the part of the assessee, the assessing officer could not assume jurisdiction under section 147.
3.2. The learned counsel on the strength of these judgments and facts discussed above, urged that the proceedings initiated under section 148 for assessment years 1989-90 and 1990-91 should be quashed.
4. The learned Senior Departmental Representative supported the view taken by the Commissioner (Appeals) in which he has held that the assessing officer has rightly initiated action under section 147. The learned Senior Departmental Representative contended that the facts of various judgments relied upon by the learned counsel are clearly distinguishable. In those cases the assessing officer who completed the original assessments had relied upon the judgments of the Hon'ble Apex Court and the Jurisdictional High Court while accepting the assessee's claim with regard to the particular points in question. On those facts, the High Court in the cases of Garden Silk Mills (supra) have held that the reopening under section 147 is not valid. In the present case, the acceptance of assessee's claim in the original assessment with regard to the deduction of wealth-tax or grant of deduction under section 80-I/80-IA on interest income is not supported by any such binding judgment but on the other hand there are various other judgments of Hon'ble Supreme Court which clearly lay down that such deductions under section 80-I/80-IA are allowable only on income derived from industrial undertakings and is not allowable even on these items of business income which are acquired from sources incidental to business. She also drew our attention to the following judgments to prove that once the proceedings under section 147 have been validly reopened, the scope of reassessment is very wide and the assessing officer is at liberty to bring to tax all items of escaped income while completing reassessment. Reliance was placed on the judgments of the Hon'ble Supreme Court in the cases of ITO v. Mewalal Dwarka Prasad (1989) 176 ITR 529 (SC) and V. Jagmohan Rao v. CIT (1970) 75 ITR 373 (SC). It has been held in the later judgment that once the proceedings under section 34 of Income Tax Act, 1922 (equivalent to section 147) are validly initiated, the jurisdiction of the assessing officer is not restricted to portion of income that escaped assessment as mentioned in the reasons recorded under section 147. Once the assessment is reopened, the previous underassessment is set aside and the whole assessment proceedings start afresh. The Income Tax Officer not only had the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.
4.1. The learned Senior Departmental Representative also placed reliance on the judgment of the Hon'ble Delhi High Court in the case of Rakesh Aggarwal v. Asstt. CIT (1997) 225 ITR 496 (Del) in which it was held that section 147 as amended with effect from 1-4-1989, brings about a significant change in the preliminary requirement of certain mandatory conditions before reassessment proceedings could be initiated under the old section. The requirement of old provision requiring fulfilment of twin conditions spelt out in section 147(a) or in section 147(b), as conditions precedent for issuing notice under section 148, the only condition for action under section 147 now is that the assessing officer should have reason to believe that income has escaped assessment which belief can be reached in any manner, and is not qualified by the precondition of failure by the assessee to make full and true disclosure of material facts, as contemplated under the unamended section 147(a). Undoubtedly, under the amended section, power to reopen assessment is much wider and can be exercised even if an assessee had disclosed fully and truly all material facts.
4.2. The learned Senior Departmental Representative placed heavy reliance on the judgment of the jurisdictional High Court in the case of Praful Chunilal Patel v. CIT (1999) 236 ITR 832 (Guj). The relevant extract from the headnote is reproduced below :
"The power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. The words "escaped assessment", where the return is filed, cover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration, or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based.
In cases where the assessing officer had overlooked something at the first assessment, there can be no question of any change of opinion, when the income which was chargeable to tax is actually taxed as it ought to have been under the law, bus was not, due to an error committed at the first assessment.
The word "reason" in the phrase "reason to believe" would mean cause or jurisdiction. If the assessing officer has a cause or jurisdiction to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. The words "reason to believe" can not mean that the assessing officer should have finally ascertained the facts by legal evidence. Unless the ground or the material on which his belief is based, is found to be so irrational as not to be worthy or being called a reason by any honest man, his conclusion, that it constitutes a sufficient reason, cannot be overridden. If the assessing officer honestly comes to a conclusion that a mistake has been made, it matters nothing so far as his jurisdiction to initiate the proceedings under section 147 is concerned, that he may have come to an erroneous conclusion whether on law or on facts. The court will not in exercise of its extraordinary jurisdiction under the Constitution, examine the sufficiency of the reason which led the assessing officer to believe that the income had escaped assessment."
4.3. The learned Senior Departmental Representative also placed reliance on the judgment of the Hon'ble Supreme Court in the case of Ess Kay Engineering Co. (P) Ltd. v. CIT (2001) 166 CTR (SC) 396 in which it was held that merely because the case of assessee was accepted as correct in the original assessment, Income Tax Officer is not precluded from reopening the assessment on the basis of his findings of facts made on the basis of fresh materials in the course of assessment of next year. The learned Senior Departmental Representative relied upon the judgment of the Hon'ble Supreme Court in the case of Phool Chand Bajrang Lal v. ITO (1993) 203 ITR 456 (SC) to support the validity of action under section 147/148 of the Act. The learned senior Departmental Representative thus strongly supported the validity of notice issued under section 148 for both the years under consideration.
5. We have considered the submissions made by the learned representatives of the parties and have gone through all the judgments cited by them. The notices under section 148 for assessment years 1989-90 and 1990-91 have been issued on 27-1-1994, i.e., well within a period of four years from the end of the relevant assessment year. The learned counsel contended that the proceedings under section 147 were initiated in relation to admissibility of depreciation on of fice buildings at Delhi and Bombay on the ground that the registered deeds of title in favour of the assessee had not been executed in the relevant assessment years. The point relating to the admissibility of depreciation in relation immovable properties which were not registered in favour of the assessee was a highly debatable point in the relevant years under consideration. The matte achieved finality at a later point of time when the Hon'ble Apex Court decide this issue. The assessing officer, therefore, honestly came to the conclusion that depreciation allowed on office buildings at Bombay and Delhi was a mistake and he therefore, rightly initiated the proceedings under section 147 of the Act. The Honble Gujarat High Court in the case of Praful Chunilal Patel (supra) has held that the assessing officer honestly comes to a conclusion that a mistake has been made, matters nothing so far as his jurisdiction to initiate the proceedings under section 147 is concerned, that he may have come to an erroneous conclusion whether law or on facts. In the present case the ground on which the reasonable belief as contemplated under section 147 so formed by the assessing officer, cannot be said to be so irrational as not to be worthy of being called a reason by any honest man. Once it is found that the proceedings under section 147 have been validly initiated, the entire assessment is open and it is the duty of assessing officer to bring to tax all items of income which had escaped assessment in the original assessment order or in the intimation under section 143(1)(a). This view is clearly supported by the judgments of the Hon'ble Supreme Court relied upon by the learned Senior Departmental Representative. The initiation of proceedings under section 147 within a period of four years, on the facts of the present case, is found to be absolutely valid and justified in view of the judgment of the Hon'ble Gujarat Court in the case of Praful Chunilal Patel (supra). Hence this common ground raised by the assessee in assessment years 1989-90 and 1990-91 is rejected.
6. The next common ground relates to allowability of wealth-tax on specified business assets under Explanation to section 40(a)(iia) of the Income Tax Act, 1961. The assessee claimed deduction of Rs. 1,05,122 in assessment year 1989-90 and Rs. 1,00,635 in assessment year 1990-91. The assessee has raised a similar ground in assessment year 1992-93 also where deduction of wealth-tax of Rs. 1,18,700 was claimed. However, the learned counsel at the time of hearing contended that the ground relating to assessee's claim for deduction of Rs. 1,18,700 in assessment year 1992-93 has become infructuous as the said disallowance was made by way of prima facie adjustment under section 143(1)(a), and such prima facie adjustment made by the assessing officer in intimation under section 143(1)(a) has been cancelled by the Commissioner (Appeals) vide his order dated 21-9-1998. The learned counsel contended that two separate grounds raised by the assessee in assessment year 1992-93 in relation to deduction of Rs. 1,18,700 may therefore, be dismissed, as having become infructuous. Hence, grounds relating to the aforesaid sum of Rs. 1,18,700 in assessment year 1992-93 are dismissed, as having become infructuous.
6.1. As regards the assessee's claim for deduction in respect of wealth-tax on specified business assets for assessment years 1989-90 and 1990-91 is concerned, the learned counsel submitted that the disallowance under section 40(a)(iia) is meant for any sum on account of wealth-tax. The Explanation appearing below the said provision clarifies that for purpose of this sub-clause, wealth-tax means wealth-tax chargeable under the Wealth Tax Act. The wealth-tax paid by the appellant-company is not a payment of wealth-tax under the Wealth Tax Act but it is a payment of wealth-tax on a specified asset under section 40 of Finance Act, 1983, which was omitted by Finance Act, 1992. He submitted that from assessment years 1984-85 to 1992-93 deduction in respect of wealth-tax paid by closely held companies under section 40 of the Finance Act, 1983 is therefore, clearly allowable. The wealth tax paid under section 40 of the Finance Act, 1983 cannot be treated as payment of wealth-tax made under the provisions of Wealth Tax Act, 1957. The learned counsel placed reliance on the decision of Calcutta Bench of Tribunal in the case of Asstt. CWT v. Park Hotel (P) Ltd. (1992) 41 ITD 501 (Cal) and the judgment of the Hon'ble Supreme Court in the case of Associated Cement Companies Ltd. v. Director of Inspection, Customs & Central Excise (1985) 153 ITR 322 (SC). He strongly urged that the deduction in respect of wealth-tax payment may be allowed in assessment year 1989-90 and 1990-91.
6.2. The learned Senior Departmental Representative relied upon the reasons mentioned in the order of the Commissioner (Appeals).
6.3. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the judgments relied upon by the learned counsel. The Calcutta Bench in the case of Asstt. CWT v. Park Hotel (P) Ltd. (supra) has held that section 40 of the Finance Act, 1983 is "a self contained code" for the purpose of levy of wealth-tax for closely held companies and it is not possible to look into the provisions of Wealth Tax Act, 1957 to supply any omissions in the said provisions. The Calcutta Bench thus held that section 40 of Finance Act, 1983, by which wealth-tax of company was revived cannot be treated as a part of Wealth Tax Act. The judgment of the Hon'ble Supreme Court in the case of Associated Cement Companies Ltd. (supra) has considered the question relating to grant of tax credit in respect of excise duty for cement levied under the Central Excise and Salts Act, 1944. It was held by the Hon'ble Supreme Court that the credit was to be given to the appellant under the tax credit scheme only in respect of excise duty for cement levied under the Central Excise and Salts Act, 1944, and not in respect of special excise duty levied under section 80 of the Finance Act, 1965. On a parity of reasoning from the aforesaid decision of Supreme Court, it was contended by the learned counsel that the wealth-tax levied for assessment years 1989-90 and 1990-91 as a result of levy under the Finance Act, 1983 by virtue of section 40 cannot be treated as levy under the Wealth Tax Act. Only if wealth-tax is levied under the Wealth Tax Act, 1957, deduction is denied under section 40(a)(iia) of Wealth Tax Act. The arguments advanced by the learned counsel at first sight appeared to be quite impressive but a careful reading of the provisions of section 40 of Finance Act, 1983 by which wealth-tax on closely held companies was in fact a levy of wealth-tax under the provisions of Wealth Tax Act. 1957. It may be imperative to reproduce section 40(1) of the Finance Act, 1983, which reads as under :
40. (1) Notwithstanding anything contained in section 13 of the Finance Act, 1960 (13 of 1960), relating to exemption of companies from levy of wealth-tax under the Wealth Tax Act, 1957 (27 of 1957) (hereinafter referred to as the Wealth Tax Act), wealth-tax shall be charged under the Wealth Tax Act for every assessment year commencing on and from the 1-4-1984 is respect of the net wealth on the corresponding valuation date of every company, not being a company in which the public are substantially interested, at the rate of two per cent of such net wealth. "
(Emphasis, italicised in print, supplied) 6.4. The aforesaid provisions clearly indicates that the wealth-tax charged oil specified assets of closely held companies is a levy charged under the provisions of the Wealth Tax Act, 1957. The provisions of section 40(a)(iia) clearly provide that any sum paid on account of wealth-tax chargeable under the Wealth Tax Act, 1957 will not be allowed as deduction in computing the income chargeable under the head "profits and gains of business or profession". We are therefore, of the considered opinion that the Commissioner (Appeals) has rightly confirmed the aforesaid disallowance in respect of wealth-tax payment in assessment years 1989-90 and 1990-91. The grounds raised by the assessee in relation to this point in assessment years 1989-90 and 1990-91 and 1992-93 are accordingly rejected.
7. The next common ground raised by the assessee in their appeals for assessment years 1989-90 and 1990-91 relates to exclusion of commission income of Rs. 2,38,145 in assessment year 1989-90 and Rs. 1,97,559 in assessment year 1990-91 for purpose of calculating deductions under section 80-I/80-IA. The learned counsel could not show any material to prove that such commission income was derived by the assessee from activities of the industrial undertaking. The learned Senior Departmental Representative relied upon the following judgments :
(i) CIT v. Sterling Foods (1999) 237 ITR 579 (SC);
(ii) Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC);
(iii) CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad); and
(iv) CIT v. Autokast Ltd. (2001) 248 ITR 110 (SC).
7.1. We have considered the submissions made by the learned representatives. There is no material on record to show that commission income received by the assessee can be treated as income derived from the said industrial undertaking. The learned counsel could not point any material or evidence existing on record on the basis of which any direct nexus between the commission income and manufacturing activities of the industrial undertaking can be established. The commission income had no nexus with the activities of the industrial undertaking owned by the assessee. We therefore, confirm the view taken by the Commissioner (Appeals) of excluding the commission income for purpose of computing deductions under section 80-I and 80-IA in assessment years 1989-90 and 1990-91.
8. The next ground raised by the assessee in their appeal for assessment year 1992-93 relates to exclusion of interest income of Rs. 2,12,426 being interest income on income-tax refund and Rs. 2,60,204 being interest income on intercorporate deposits, for purpose of computation of deductions under section 80-I/80-IA. The learned counsel submitted that the assessing officer has himself assessed such interest income under the head "Income from business". In earlier years, viz., assessment year 1989-90 and 1990-91 the assessing officer has himself allowed deduction under section 80-I/80-IA in respect of such interest income in the assessments completed under section 147.
8.1. The learned Senior Departmental Representative relied upon the same set of judgments in which it has been held that only those items of income which can be treated as income derived from industrial undertaking qualify for grant of deduction under section 80-I/80-IA. The disallowance confirmed by the Commissioner (Appeals) is fully supported by the aforesaid judgments of the Supreme Court and Madras High Court, says the learned Senior Departmental Representative.
8.2. We have carefully considered the submissions made by the learned representatives of the parties and have gone through all the judgments cited by the learned representatives. The Hon'ble Supreme Court in the case of Sterling Foods (supra) held that the word "derived" is usually followed by the word "from" and it means, "get, to trace from a source" arise from, originate in, show the origin or formation of". 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 entitlements became available. The words "derived from" necessarily imply direct nexus between the profits and gains and the industrial undertaking. In that case the nexus was not direct but only incidental. The sale consideration from import entitlements 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 Act.
8.3. Hindustan Lever Ltd. v. CIT (supra). The assessee in this case obtained import entitlements on export of goods. The import entitlements utilised to purchase goods for use in manufacture of other products which were sold in India. The profits from such sales cannot be treated as profits derived from export for purpose of grant of deduction under section 2(5)(i) of the Finance (No. 2) Act, 1962 which provides for grant of deduction from amount of income-tax and super-tax chargeable from an assessee whose total income includes any profits and gains derived from export of any goods. The Supreme Court in this case has also held that the immediate source of the profit was sale of goods. The export of other goods was not even the second degree but it had to be traced to an even more remote degree. The import was of palm oil. The import was possible because of earlier export of goods at a loss. In the chain of sequence the earlier export would be four degrees away. The assessee's profit from sale of its goods in India could not be said to have been derived from export sales.
8.4. CIT v. Autokast Ltd. (supra). The relevant head note is reproduced below :
"From the decision of the Kerala High Court (see CIT v. Autokast Ltd. (1998) 229 ITR 789 (Ker)) holding that where the assessee kept the moneys borrowed from the Industrial Development Bank of India for purchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery, the department took an appeal to the Supreme Court. The Supreme Court reversed the decision of the High Court holding that the interest was taxable in the hands of the assessee."
8.5. CIT v. Pandian Chemicals Ltd. (supra). The relevant extract from the headnote is reproduced below :
"Held, that the assessee had claimed, that the interest on deposits made with the Tamil Nadu Electricity Board had to be taken into account for purposes of section 80HH. Though the assessee had to necessarily make the deposit with the Electricity Board for running the industry and the power supply would not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The immediate source of interest was the deposit itself. In other words, the immediate and effective source of the interest was the deposit and not the industrial undertaking. The fact that the amount was assessable as business income would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. Hence, the interest could not be treated as income derived from an industrial undertaking for purposes of relief under section 80HH."
8.6. The aforesaid judgments clearly indicate that the fact that amount of particular income was assessable as business income would not be sufficient to hold that such interest income was derived from actual conduct of the business activities of the industrial undertaking. A direct nexus is required to be established between the relevant item of income and the activities of the industrial undertaking. Keeping in view the aforesaid principles laid down by the Hon'ble Apex ourt and the Hon'ble Madras High Court, we are of the view that the interest income on income-tax and interest income on intercorporate deposits, cannot be regarded as income derived by the assessee from its industrial undertaking. The fact that this has been assessed as income from business or the fact that in the past deduction under section 80-I/80-IA has been allowed thereon, would not entitle the assessee to get deductions under section 80-I/80-IA on such amount of interest income in view of the aforesaid judgments of the Hon'ble Apex Court. We, therefore, do not find any merit in the ground raised by the assessee in their appeal for assessment year 1992-93.
9.1. We will now deal with the revenue's appeals. The revenue has raised the following identical ground in all these appeals :
(1) The learned Commissioner (Appeals) has erred in law and on facts of the case in allowing deduction under section 80-I of Rs. 3,88,486 for assessment year 1989-90 (Rs. 2,52,978 for assessment years 1990-91, Rs. 2,87,637 for assessment years 1991-92; and Rs. 1,63,165 for assessment year 1992-93) on interest income. The interest earned on short-term deposits of surplus or idle funds cannot be treated as profits and gains derived from the business in view, of judgments;
(i) CIT v. Universal Radiators (P) Ltd. (1981) 128 ITR 531 (Mad);
(ii) CIT v. Cochin Refineries Ltd. (1985) 154 ITR 345 (Ker); and
(iii) English Electric Co. of India Ltd. v. CIT (1987) 168 ITR 513 (Mad).
9.2. At the outset, Shri M.K. Patel, the learned counsel submitted that the ground raised by the revenue is misleading as the relief granted by the Commissioner (Appeals) does not pertain to interest earned on short-term deposits of surplus or idle funds but it pertains to interest income derived by the assessee from activities which are inextricably connected with the activities of the assessee's industrial undertaking. He pointed out that complete details of such interest derived from industrial undertaking were given to the assessing officer as well as to the Commissioner (Appeals). The Commissioner (Appeals) after careful consideration has allowed deductions under section 80-I/80-IA only on those items of interest income which can be considered as income derived from industrial undertaking. The learned counsel has submitted a chart showing the details of such interest income in respect of which relief has been granted by the Commissioner (Appeals) and which in fact is the real issue requiring consideration in the revenue's appeals :
Grounds Asst. yr. 1989-90 Asst. yr. 1990-91 Asst. yr. 1991-92 Asst. yr. 1992-93 Department's appeals :
(a) Interest income whether to be considered as elgible profits under section 80-I/80-IA
(i) On margin money deposits with bank against guarantees, bills discounting, letters of credit, etc. 2,57,894 1,93,608 3,02,327 4,49,269
(ii) On electric power connection deposits and on telephone connection deposit 6,124 10,469 7,650
(iii) On investment deposit with IDBI under section 32AB on purchase of new machinery 12,89,926 8,14,937 8,07,266 1,95,742
(iv) IDBI documents in respect of deferred payments instalments receivable from customers for sale of furnaces 40,955 Total interest income (I) 15,53,944 10,18,914 11,50.548 6,52,661 i.e., 10,11,914 Eligibile amount of deduction under section 80-I/80-IA at 25% of (I) 3,88,486 2,52,978 2,87,637 1,63,165 9.3. The learned Senior Departmental Representative relied on the aforesaid judgments of the Hon'ble Supreme Court and the Hon'ble Madras High Court to support her contention that the interest income earned by the assessee on margin money or on electric power connection deposits or on investment deposit with IDBI would not qualify for grant of deduction under section 80-I/80-IA in view of the same set of judgments relied upon by her while dealing with similar ground raised in assessee's appeal for assessment year 1992-93.
9.4. The learned counsel supported the order of the Commissioner (Appeals). He submitted that so far as interest on margin money deposits with bank against guarantees is concerned, it has direct nexus with the manufacturing activities of the industrial undertaking. Unless such guarantee against import of raw material are given, the assessee will not be able to acquire raw material for use in manufacture of their products and keeping of margin money as deposit with bank against guarantee is a normal trade practice. He therefore, urged that the Commissioner (Appeals) has rightly directed the assessing officer to grant deduction under section 80-I/80-IA on such interest on margin money, bills discounting and letters of credit, etc. 9.5. However, in respect of interest on electric power connection deposits and telephone connection deposits, the learned counsel was fair enough to admit that the judgment of the Madras High Court relied upon by the learned Senior Departmental Representative and cited supra is against the assessee on this point.
9.6. As regards the interest on investment deposit with IDBI under section 32AB is concerned, the learned counsel contended that the deposits in the Investment Deposit Scheme with IDBI have been made out of income of industrial undertaking and the same has been utilised for purchase of plant and machinery. The amount set apart and deposited with IDBI has a direct nexus with the manufacturing activities of the industrial undertaking as it can be utilised only for purchase of new plant and machinery, etc. as specified in section 32AB. Thus, the origin of deposit or source of deposit is income from industrial undertaking and the utilisation is also restricted for purchase of new plant and machinery i.e. for a direct purpose of industrial undertaking. The deduction has rightly been granted in respect of such income under section 80-I. As regards the interest on deferred payments from customers is concerned, the learned counsel relied on the judgment of the Supreme Court in the case of CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC) in which the amount awarded as interest by the arbitration while settling the dispute relating to execution of contact was held to be business income. The learned counsel contended that the aforesaid judgment of the Supreme Court clearly supports the assessee's contention that the interest income of Rs. 40,955 received from customers in respect of deferred payments is a part of sale proceeds and therefore, the same clearly qualifies for grant of deduction under section 80-I/80-IA.
9.7. We have given our deep and thoughtful consideration to the submissions made by the learned representatives. The assessee's claim for grant of deductions under section 80-I/80-IA has been considered in the light of the aforesaid judgments of the Hon'ble Supreme Court and the Hon'ble Madras High Court.
9.8. In our view, the interest income specified in item Nos. a(i), a(iii) and a(iv), on the facts of the present case can be treated as income derived from industrial undertaking. The margin money deposits with bank for giving various guarantees are inextricably connected with the activities of industrial undertaking. Similarly the guarantee given for issue of letters of credit and the interest income on bills discounting have a direct nexus with the manufacturing activities of the said industrial undertaking. The assessee gave complete details before the learned Departmental Authorities of such interest income. The explanations, given before the assessing officer have not been found to be incorrect. Likewise the interest on investment deposits with IDBI is in consonance with the legislative intention of section 32AB to promote the growth of industry by installing new plant and machinery. The deposits have undoubtedly been made from income of industrial undertaking. It is apparent from the profit & loss account that the assessee is engaged solely in the activity of manufacture of induction furnace, heating products, welding products, electronics products in technical collaboration with Inductothem incorporated in USA and its associate companies world over. The deposits in investment deposits with IDBI have been made out of income of the said industrial undertaking for the exclusive purpose of its utilisation for purchase of new plant and machinery. Such interest income has, therefore, clear and direct nexus with the activities of the said industrial undertaking. The interest on deferred payments received from the customers is a part of sale price as has been held by the Hon'ble Apex Court in the judgment relied upon the learned counsel. We are therefore, of the considered opinion that the view taken by the Commissioner (Appeals) in relation to these three items of interest income is valid and justified. However, deduction granted under section 80-I/80-IA on interest received on electric power connection deposits and telephone connection deposits by the Commissioner (Appeals), details of which have been given in a(ii) of the chart reproduced, hereinbefore, is held to be wrong in view of the judgment of the Hon'ble Madras High Court in the case of Pandian Chemicals Ltd. (supra). The relief so granted by the Commissioner (Appeals) to this extent is, therefore, directed to be withdrawn.
10. In the result, the assessee's appeals for assessment years 1989-90 and 1990-91 are partly allowed, and the assessee's appeal for assessment year 1992-93 is dismissed. All the appeals filed by the revenue are partly allowed.