Madras High Court
Commissioner Of Income-Tax vs Menon Impex P. Ltd. on 2 September, 2002
Equivalent citations: (2003)180CTR(MAD)40, [2003]259ITR403(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu, K. Raviraja Pandian
JUDGMENT R. Jayasimha Babu, J.
1. The question referred is as to "whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the interest income derived by the assessee from funds in connection with letter of credit is income derived from the profits of the business of the industrial undertaking so as to be entitled to get the benefit of Section 10A of the Income-tax Act, 1961 ?".
2. The assessee had set up a new industrial undertaking in Kandla Free Trade zone for the manufacture of light engineering goods. The goods therein were exported during the assessment year 1985-86. In the course of the business of that industrial undertaking, the assessee was required to open letters of credit with banks who had as a condition for issuing such letter required the assessee to make deposits. On those deposits, the assessee earned interest.
3. The assessee's claim for treating that amount of interest income as income derived from the newly set up industrial undertaking and treating that income as exempt under Section 10A of the Income-tax Act, 1961, was negatived by the Assessing Officer and on appeal by the Commissioner, but was allowed by the Tribunal.
4. Section 10A of the Act provides that the profits and gains derived by an assessee from an industrial undertaking to which that section applies shall not be included in the total income of the assessee. The Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT has held that the words "derived from" are narrower in scope than the words "attributable to".
5. In the case of CIT v. Sterling Foods , the Supreme Court observed that (headnote): "the word 'derive' 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". It was pointed out that unless the source of the income is from an industrial undertaking, such income cannot be regarded as "derived from" industrial undertaking. It was held that the income derived from sale of import entitlements could only be said to be the export promotion scheme and not the industrial undertaking. It was also observed by the court that where nexus between profits and gains and the industrial undertaking was not direct, but incidental, such income could not have been regarded as having been derived from industrial undertaking.
6. In this case the interest received by the assessee was on deposits made by it in the banks. It is that deposit which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letters of credit which letters of credit were in turn used for the purpose of the business of the industrial undertaking does not establish a direct nexus between the interest and the industrial undertaking.
7. The Tribunal, therefore, was in error in holding that there was direct nexus between the two. The question referred to us is answered in favour of the Revenue and against the assessee.