Income Tax Appellate Tribunal - Cuttack
Asstt. Cit vs Maxcare Laboratories Ltd. on 22 June, 2004
Equivalent citations: [2005]92ITD11(CTK)
ORDER
R.C. Sharma, A.M. These are the appeals filed by the revenue against the orders of the CIT (A) for the assessment years 1995-96 to 1998-99.
2. The only grievance of the revenue in all the appeals relate to the CIT (A)'s action in directing the assessing officer to recompute the deduction under section 80-IA of the Income Tax Act.
3. Rival contentions have been heard and record perused. In the course of assessment under section 143(3), the assessing officer found that the assessee has claimed the deduction under section 80-IA in respect of interest income earned by it. As per the assessing officer, section 80-IA provides for deduction when the gross total income of an assessee includes any profits and gains derived from an industrial undertaking. He, therefore, declined the assessee's claim for deduction under section 80-IA in respect of interest income.
4. By the impugned order, the CIT (A) observed that the assessee-company has a franchise for manufacturing Dabur products with M/s Dabur India Ltd. For manufacturing of these products, the machineries are financed by M/s Dabur Finance Ltd. whereas the interest income is earned from M/s Dabur India Ltd., Dabur Finance Ltd. and M/s Cherry Leasing & Financing Co. Ltd with whom the assessee made agreement for providing financial assistance to it and such arrangements with the company are backed by stipulation of making security deposits in the course of business, It was further observed that assessee was obliged to keep deposit and earn interest thereon with these companies in the course of its business and was having direct nexus to its business. In respect of miscellaneous income, the CIT (A) observed that the miscellaneous income arising out of sale of empty drums/containers, sale of useless materials which is the outcome of the manufacturing process of the assessee-company. Therefore, the same is also an integral part of the business of the industrial undertaking of the assessee. After relying on various judgments of the Tribunal, the CIT (A) reached to the conclusion that interest expenditure incurred by the assessee is much more than the interest income earned by it from the very same source and, therefore, ultimately there is no interest earning and, therefore, deduction under section 80-IA could not be denied.
5. The learned Departmental Representative relied on the order of the assessing officer and submitted that only profit of industrial undertaking is eligible for deduction under section 80-IA and not the interest income which is to be assessed as income from other sources. He further reiterated the case laws relied on by the assessing officer in his order.
6. On the other hand, the learned authorised representative vehemently argued that giving of deposit by the assessee was not only inextricably linked with the business of industrial undertaking of the assessee but the assessee was under business compulsion to give such deposit for the purpose of its business of industrial undertaking. As per the learned authorised representative, the assessee-company was established only at the instance of M/s Dabur India Ltd. for manufacturing and marketing of products under the technical know-how and trade-name of Dabur. As per the learned authorised representative, Dabur India Ltd. was to provide corporate guarantee of Rs. 4 crores for the sanction of various financial assistance in favour of the assessee-company. In turn, the assessee-company was to give deposit as security money to Dabur India and its associate concern. Giving of deposit was the business compulsion and not out of sweet will of the assessee and therefore, there is no reason to deny deduction under section 80-IA on such income. As an alternate arrangement, the learned authorised representative submitted that there was no actual earning of interest in view of the fact that interest paid was much more than the interest received and there was always debit balance of interest expenditure incurred by the assessee. Thus, as per the learned authorised representative, strictly speaking there was no positive income on account of interest becauso after adjusting the interest 'earned out of the interest paid, as both the income and expenditure on account of interest are of the same genesis, there was no positive income on account of interest. He, therefore, argued that the CIT (A) was justified in allowing the assessee's claim for deduction after recording his finding that interest income and other miscellaneous income was having direct and proximate connection with the business of industrial undertaking so as to entitle the assessee for deduction under section 80-IA and that there was no positive income on account of interest after setting of the interest paid by the assessee-company.
7. We have considered the rival contentions, carefully gone through the orders of the authorities below and thoughtfully deliberated upon the case laws cited by the learned representatives of the revenue and assessee in the context of factual matrix of the case.
8. The crux of the issue revolves around the determination of the nature of income which qualifies for deduction under section 80-IA. The provisions of section 80-IA as contained in the statute book for the relevant assessment year under consideration read as follows :
80-IA-Deduction in respect of profits and gains from industrial undertakings, etc., in certain cases "Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship or the business of a hotel .........."
9. It is crystal-clear from the reading of the above provisions that only the income derived from business of industrial undertaking is eligible for deductions under section 80-IA. There is no dispute to the fact that there are plethora of judgments which lays down the proposition that the words "derived from industrial undertaking" had been used by statute to restrict the deductions of only those income which has been directly derived from the industrial undertaking and not to other income which is incidental to the carrying of industrial undertaking. There is also no dispute to the fact that these judgments have been rendered in the context of deduction under sections 80-I and 80HE Let us now find out what the section 80-I speak for.
80-IDeduction in respect of profits and gains from industrial undertakings after a certain date, etc. "Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship ...................."
10. It is crystal-clear from the language used in section 80-I that the deduction is to be restricted to income which is derived from industrial undertaking. Now we have to examine what is the difference between provisions of sections 80-I and 80IA. Minute reading of both the provisions clearly indicate that in the earlier section 80-I, the statute has used the expression "derived from with a view to give a restricted meaning to the income of the industrial undertaking. However, in section 80-IA, expression used is 'Profits and gains derived from any business of industrial undertaking". It clearly shows that the intention of the 1Pgislature while inserting the additional words in section 80-IA, i.e., "any business of", was to give benefit of deduction not only to the profits and gains derived from the industrial undertaking but also to give benefit of deduction in respect of the income having a close and direct nexus with the profit and gains of the industrial undertaking.
11. The word "business" is a word of wide amplitude so as to cover any trade, industry, or any act of adventure in the nature of trade whereas the word "industry" is a word of very limited meaning. Whenever the legislature had intended to give benefit of deductions to the wider extent of income and not only to the income derived from industrial undertaking, it has used the expression like 'Profit attributed to". Now we find that to give more extended benefit the statute has used the word "income derived from business of industrial undertaking". Thus legislature certainly wants to give benefit of deduction not only to the income derived from industrial undertaking but to all sort of income which is derived from business of industrial undertaking. Meaning thereby all sort of income which is inextricably related to the carrying on the business of industrial undertaking is to be considered for computing deductions under section 80-IA. Thus, an act which is required to be undertaken essentially for carrying on the business of industrial undertaking and if any income is generated out of such act, the same is to be considered for computing the deduction under section 80-IA.
12. From the record we find that for the purpose of business of its industrial undertaking, the assessee had entered into an agreement with M/s Dabur India Ltd. according to which Dabur is to get its products manufactured by the assessee-company under the technical know-how and in the trade-name of Dabur. The Dabur India Ltd. was to arrange necessary business and bank guarantee for the assessee-company for the manufacture and sale of products on the terms and conditions as provided in the agreement. As per the terms and conditions of the agreement, the technology, material procurement, quality control including selection of machinery, etc. shall be as per the approval of M/s Dabur India Ltd. only. M/s Dabur India Ltd. had organised term-loan and working capital from the bankers and its associate concerns and also extended corporate guarantee to the respective bankers for extending financial assistance to the assessee-company. On the other hand, the assessee-company was under business compulsion to have deposit with Dabur India and its associate concerns. During the year under consideration, the assessee had paid interest on the loan and other credit facilities extended by bank and Dabur Finance Ltd., etc. As the assessee was under the business obligation to have security deposit with M/s Dabur India Ltd. and its associates, it had earned interest income on such deposits. Such deposits with M/s Dabur India Ltd. and its associates was as per the business compulsion of M/s Dabur India Ltd. as provided in the agreement. Such deposit was given in consideration of providing bank guarantee, organising finance and providing franchise to set up the industry by the assessee-company, there is a direct and proximate nexus between the interest earned on such deposit and interest paid on the funds borrowed for running of the business of industrial undertaking. The Hon'ble Supreme Court in the case of Vellore Electric Colpn. v. CIT (1997) 227 ITR 557 (SC), while considering the assessee's claim under section 80-I in respect of interest income earned on the investment in securities, held that there is a direct and proximate connection between the carrying on of business of generation and distribution of electricity by the assessee as a licensee under the Electricity Supply Act and the income derived by way of interest from the investment in the securities. It was also held that the profits and gains can be said to be from priority industry under section 80-I, if there is a direct and proximate connection between the profits and gains of the business of priority industry.
13. The Tribunal, Pune Bench, in the case., of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune) and Associated Flexibles & Vires (P) Ltd. v. Dy. CIT (1999) 70 ITD 374 (Pune), observed that interest received on deposits made with the bank for availing of various credit facilities is eligible for deduction under sections 80HHA and 80-I. It was also observed that for granting such facilities, the banks insist upon the assessee for depositing substantial amount with them. Thus, the Tribunal observed that the assessee did not deposit the surplus fund lying with the bank at its choice, but it was out of business compulsion that the assessee had to deposit the money in the fixed deposits and consequently, it earned interest thereon. It was also observed that deposit in the course of business of manufacturing or production must not be by way of choice but out of necessity or business compulsion in order to carry on the said business.
14. Similarly, the Tribunal, Delhi Bench in the case of Asstt. Commissioner v. Gallim Equipment (P) Ltd. (2001) 79 ITD 41 (Del) observed that where there is a direct nexus between the interest income and industrial undertaking of the assessee, the interest earned on FDR were totally interwoven with the carrying of the business, therefore, interest is to be treated as derived from the said industrial undertaking and the assessee is entitled to the benefit of section 80-I on interest income.
15. Applying the proposition laid down in the above judgments and keeping in view the findings recorded by the CIT (A), we can safely reach to the conclusion that the deposits given by the assessee out of business compulsion and the interest earned thereon even though not derived from industrial undertaking but was having direct and proximate connection with the business of industrial undertaking of the assessee, the assessee was, therefore, eligible for deduction under section 80-IA on the interest earning. The case laws discussed by the assessing officer in his order are related to deduction under sections 80HH and 80-I. There are several rulings of the Honble courts, in which the claim under sections 80HH and 80-I, etc. In which the expression "Profits and gains derived from industrial undertaldng" was use and the claim was not allowed by following the principle that the expression 'Verived from" industrial undertaking should be given restricted meaning and whenever the legislature wanted to give wider expression, it employed the expression "attributable to". But there was no occasion before the courts, brought to our notice, to consider further wider expression as used in section 80-IA, i.e., 'Profits and gains derived from any business of an industrial undertaking". As such the rulings of these courts are not applicable to the instant case before us.
16. We also find that the assessee was under compulsion to provide such deposits for availing the financial assistance for running its industrial undertaking on which the assessee, in turn, has paid substantial interest. The interest payment during the year is much more than the interest received. Therefore, in reality, there is no interest earning when it is being adjusted against the interest paid, receipt and payment of interest being of the same genesis. Even for accounting purpose, one has to deduct the interest received out of interest paid for arriving at the net interest expenditure. There is no dispute to the fact that after deducting interest received from the interest paid, there was debit balance of the interest. With regard to the proposition of netting off the interest, as per our considered view, when profit is determined under the head "Profits and gains of business or profession", what are included in it are the net receipts/payments of the various components that go to make the profit under that head. Thus, if the profits of business include certain receipts which have corresponding costs, or if the profits include certain credits and the business has also debits of the same nature, if these are not netted out against each other, the profit of business will present a distorted picture and may lead to injustice while implementing an incentive provision. In the instant case, the said interest earning has merely gone to reduce the net interest burden of the assessee-company. Thus, in effect, there is no income on account of interest included in the profits of the business of industrial undertaking, so no reduction whatsoever is called for while computing deduction under section 80-IA. While computing profit of the business of industrial undertaking under section 80-IA, revenue receipts can be adjusted against revenue expenditure of the like nature. Revenue receipt in the form of interest went to reduce the revenue expenditure of interest, because funds were borrowed for the purpose of business of industrial undertaking and funds were kept in deposit for the purpose of business of the assessee's industrial undertaking. Thus, interest income or expenditure is inextricably linked and is having direct and proximate connection with the business of industrial undertaking. It is pertinent to mention here that even the Honble Supreme Court has supported the principle of "netting" in the following cases viz., :
(a) CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) (at p. 321, last para)
(b) CIT v. Karnataka Power Corpn. (2001) 247 ITR 268 (SC)
(c) CIT v. Kamal Co-operative Sugar Mills (2000) 243 ITR 2 (SC).
17. In these cases, Hon'ble Supreme Court held that rather than charging interest income to tax under the head "Income from other sources," it shall be deducted from the cost of capital asset as it was inextricably linked with it.
18. In the instant case, in all the years under consideration, the expenditure of interest is higher than the interest income, no interest income augmented the profit of business of industrial undertaking which needs to be reduced for computing deduction in respect of business of industrial undertaking. There is also no dispute to the fact that the assessee-company was having only source of income from the business of this industrial undertaking.
19. In view of the above discussion and the facts and circumstances of the case, and keeping in view the findings recorded by the CIT (A), we do not find any reason to interfere with his order.
20. In respect of other miscellaneous income arising from sale of empty drums/containers, sale of useless materials, we find that all the sale proceeds were only out of the business of industrial undertaking of the assessee. Therefore, even for determining the profits and gains "derived from any business of industrial undertaking", manufacturing or producing any article or thing include sale proceeds of such article or thing of scrap generated during the course of such manufacturing activity. It is not possible to close eyes to the event which amounts to increase the sale consideration. After all what is to be determined is the profits and gains of business of industrial undertaking and there is no warrant to stop for the above purpose at sales of main products only. The controversy here is not when manufacturing activity of the assessee was over, but what was the profit and gains of the business of the industrial undertaking and how was it to be determined. For determining the above profits of business of industrial undertaking it is not possible to ignore sale of empty drums/containers, sale of useless materials which is closely and directly connected with and outcome of the manufacturing process itself. Thus, we find that there is a direct nexus between the sale of these items and carrying on of business of industrial undertaking.
21. In the result, all the appeals of the revenue are dismissed.