1. This is assessee's appeal directed against the order passed by the learned CIT(A)-II, Pune, dt. 30th Sept., 1991, relevant to asst. yr.
1990-91.
"The learned CIT(A) erred in not allowing the travelling expenses incurred under Rule 6D, as worked out by the assessee, by not appreciating the wordings of Rule 6D. He ought to have followed the decision in the case of S.V. Ghatalia v. ITO (1983) 4 ITD 583 (Bom)." It is common ground that this issue is covered against the assessee by Bombay High Court decision in the case CIT v. Arrow India Ltd. (1998) 229 ITR 325 (Bom). Therefore, following the same we uphold the order of the learned CIT(A) and dismiss this ground of appeal of the assessee.
"The learned CIT(A) erred in treating the expenses incurred on employees accompanying guests also as coming within purview of the disallowance under Section 37(2A)" After hearing both the sides and going through the record, we direct the AO to consider the disallowance under Section 37(2A) after allowing 20 per cent on account of employees participation as being done in similar type of other cases and allow necessary relief to the assessee.
"3. The learned CIT(A) erred in not allowing Section 80-I relief in respect of income earned from erection, installation and after sales service activity of the company, which activity is very much part and parcel of industrial undertaking. This activity is inseparable from industrial undertaking. He ought to have followed the ratio of following Court cases : (a) Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC); and (b) CIT v. Buckau Wolf New India Engineering Works Ltd. (1983) 150 ITR 180 (Bom).
4. The learned CIT(A) also erred in not all allowing Section 80-I relief in respect of interest earned, which is part of business income. In fact the CIT(A) erred in treating the interest income as income earned from investments. However, the interest earned is mostly for the interest charged to the customer, for late payments of the bills, as per agreement with them. He ought to have followed the decision in the case of CIT v. Flender Macneill Gears Ltd. (1984) 150 ITR 83 (Cal)." 5. We find that while making part disallowance in allowing the deduction under Section 80-I as claimed by the assessee, the AO ascertained the nature of income from services rendered by recording a statement on oath of Shri Shripad Mirathi, managing director of the assessee-company, who disclosed the following facts : "1. Relief under Section 80-I was first claimed in asst. yr.
1983-84; 3. Income of Rs. 51,89,825 was earned from services rendered by the engineers of the company for installation, commissioning, etc.; 4. Sale bills/invoices for these incomes are separately raised and are not included in the sale invoices ; 5. Services rendered are in the nature of supervision, erection and installation work ; 8. Excise duty is collected only on products cleared from the factory." In view of the above-mentioned facts, the AO concluded that the service charges are recovered from services rendered by the assessee-company's engineers, outside the appellant's factory and that the net profit of Rs. 19,12,855 on various service charges are not in the nature of income derived from the industrial undertaking and hence the assessee is not entitled to relief under Section 80-1 in respect of the income from services rendered by its engineers. Further, the AO has also stated that the assessee has earned income of Rs. 3,87,110 on bank deposits and deposits in the IDBI. The AO has stated that this income is also not derived from industrial undertaking and hence has been excluded while computing relief under Section 80-I. In this connection, AO has placed reliance on the decisions in Indian Aluminium Co. Ltd. v.CIT (1980) 122 ITR 660 (Cal) and Addl. CIT v. Vellore Electric Corporation Ltd. (1979) 119 ITR 523 (Mad). The action of the AO has been confirmed by the learned CIT(A).
6. The learned counsel for the assessee submitted that the claim of relief under Section 80-1 in respect of net profit on the income earned from erection, installation and after-sales service activities of the assessee-company, which is the activity stated to be very much part and parcel of industrial undertaking, is inseparable and assessee is entitled to relief. Similarly, interest earned which is mostly for the interest charged to customers for late payment of bills is a part of business income, for the purpose of Section 80-I which has not been allowed by the AO. Therefore, while following decision of the Calcutta High Court in the case of CIT v. Flender Macneill Gears Ltd. (1984) 150 ITR 83 (Cal) it was pleaded for allowing the relief. Similarly, it was pleaded that the interest is also derived from industrial undertaking and hence eligible for deduction under Section 80-I.7. The learned Departmental Representative while relying on the basis and reasoning as given by the authorities below pleaded for confirmation of the impugned order. It was also submitted that the assessee is manufacturing and selling generating sets and at the option of purchaser, the assessee also provides erection, installation and after-sales service to such customers who intend to get such services.
Since assessee's counsel has himself admitted that even sale of generating set can be effected without providing of these services, therefore, the erection, installation and after-sales services could (sic-not) be said to be part of activity of industrial undertaking, especially when net profit on such activities, as computed by the assessee, has only been considered, for exclusion. Therefore, the same is not entitled to deduction under Section 80-I. Similarly, on the interest income, it was pleaded that the same is also not derived from industrial undertaking hence not eligible for deduction under Section 80-I.8 After hearing both the sides, going through the record, case law and the documentary evidence to which our attention has been drawn, we find that the assessee has claimed deduction of Rs. 13,64,703 under Section 80-I. For working of this amount, the assessee has excluded commission income of Rs. 1,61,665. However, the following incomes have been included : The AO called for further details in respect of these incomes. Dividend income has been derived on investment in shares. Other income is received from sale of scrap, discount is received on purchases, interest has been earned on bank deposits and deposits with IDBI, income from services rendered have been earned by rendering supervision and advice in respect of installation, commissioning, overhauling and repairs of diesel generating sets, The assessee submitted before the AO that it is mainly engaged in manufacturing business and is having composite business including manufacturing and rendering of services.
The assessee is stated to have incurred substantial expenses for earning income from service charges and, therefore, whole amount of Rs. 51,89,825 cannot be excluded while computing deduction under Section 80-I. Reliance was also placed on the Supreme Court's decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC).
9. After taking into consideration the judgments as noted above, AO noted that assessee claimed deduction under Section 80-I and included in its claim for arriving at the amount of deduction, the charges for erection, commissioning and after sales service besides interest income. Since the claim included erection, commissioning and after-sales service charges and income from interest, therefore, in view of the ratio of decisions as noted by the AO, claim to the extent of Rs. 19,12,855 was disallowed by the AO and GIT(A) confirmed his action.
10. In order to judge the claim of the assessee, it would be relevant to discuss the issue in detail. Earlier deduction in this regard was being allowed under Section 80E and the distinguishing feature of the earlier Section 80E and the existing one is that earlier the expression 'profit attributable to priority industry1 was on the statute book while in the existing provision legislature has used expression 'any profits and gains derived from industrial undertaking1. The controversy had since been going on before the Courts about the scope and actual meaning of the expression 'attributable to' and 'derived from' and Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (supra), for the first time made distinction in the above referred two expressions and relevant observations are at pp. 93 and 94 which are reproduced as under : "As regards the aspect emerging from the expression 'attributable to' occuring 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'. Had the expression 'derived from' been used it could have with some force been contended that a balancing charge 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 Section 80J. In our view, since the expression of wider import, namely, attributable to has been used, the legislature intended to cover receipt from sources other than the actual conduct of the business of generation and distribution of electricity".
11. Similarly, Karnataka High Court in the case of Sterling Foods v.CIT (1984) 150 ITR 292 (Kar) has discussed the expression 'derived from' and, observed that expression 'derived from1 has a definite but narrow meaning and it cannot receive a flexible or wider concept.
12 To the same effect, the Hon'ble Madras High Court in the case of CIT v. Jameel Leather Suppliers (2000) 246 ITR 97 (Mad) has taken the view in favour of the Revenue. In the case of Ashok Leyland Ltd. v. CIT (1997) 224 ITR 122 (SC) Hon'ble Supreme Court had again reiterated the same view as laid down in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) and while upholding the above view, Hon'ble Delhi High Court in the case of CIT v. Cement Distributors (1994) 208 ITR 355 (Del) has opined that commercial connections are irrelevant from the proposition of 'derived from'.
13. In view of the criteria and parameters as laid down by their Lordships in various cases, Hon'ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad), where issue before it was relating to claim of the assessee for deduction under Section 80HH and the expression used is similar, concluded that assessee who had deposited the amount with State Electricity Board and earned interest, such interest income cannot be said to have been derived from industrial undertaking as immediate source of interest is the deposit and not business. Their Lordships of Hon'ble Madras High Court have further opined that mere fact that interest amount was assessable as business income itself would not be sufficient unless the source of profit is the undertaking. Therefore, it was held that the assessee is not eligible to claim deduction and there were no compelling reasons to give wider meaning to the expression 'derived from' under Section 80HH to cover every aspect. Further, it will be pertinent to mention that S.L.P. filed by the assessee has since been rejected as reported in (2000) 246 ITR (St) 243, as the intention of the legislature was that industrial undertaking must be the source of the profits or gains [Pandian Chemicals Ltd. v. CIT--SLP (Civil) No.8014 of 2000].
14. To the same effect, in order to arrive at the conclusions, Hon'ble Madras High Court has followed the ratio of the judgment of Pandian Chemicals Ltd. (supra) in the case of Fenner (I) Ltd v. CIT. Further, Hon'ble Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC) were again seized with the same expression 'derived from' used in Section 80HH. Their Lordships while considering the decision of the same Court in the case of Cambay Electric Supply Industrial Co.
Ltd. (supra) decided the controvery in respect of claim of the assessee under Section 80HH on the profit earned from sale of import entitlements against the assessee.
15. Now adverting to the issue in hand, we find that the claim of the assessee under Section 80-I included charges for errection, installation, commissioning and after-sales services and income from interest from bank and IDBI deposits, and the AO disallowed deduction under Section 80-I on net profit as arrived at by the assessee on receipts from errection, commissioning installation and after-sales service charges besides interest income on bank and IDBI deposits as the assessee has failed to establish the alleged interest on delayed receipts of sale proceeds. In view of the ratio of the decisions as noted above and particularly of the Madras High Court decision in the case of Pandian Chemicals Ltd. (supra) (in which SLP has also been rejected as noted in the earlier part of order) this item of income could not be held to be derived from industrial undertaking as there is no direct nexus between the income earned and industrial undertaking and moreover, it is found that industrial undertaking is not immediate and effective source of the said income, Income can be said to be derived from an activity if the said activity is immediate and effective source of the said income. To our mind, even income cannot be said to be derived from an activity merely by reason of the fact that activity may have to earn the said income is an indirect, incidental or remote manner. Since commercial connections are irrelevant and it is also not sufficient even if such income is assessable as business income, therefore, neither the net profit out of receipts from such activity nor interest earned from bank deposits and on IDBI deposits can be said to have been derived from the industrial undertaking.
Therefore, following earlier decision of the Pune Bench in the case of Vardhini Udyog v. Dy. CIT in ITA No. 411/Pn/1995, dt, 21st Aug., 2001 [reported at (2003) 80 TTJ (Pune) 453--Ed.], and in ITA No.908/Pn/1995, dt. 30th Aug., 2001, whereby this Bench preferred not to place reliance on the earlier decisions in the cases of Dy. CIT v.Jagdish Electronics (P) Ltd (1998) 66 ITD 542 (Pune) and Finolex Pipes Ltd. v. Dy. CIT (2000) 68 TTJ (Pune) 422, for the reasons given in those orders, we uphold the action of the authorities below and hold that net profit out of receipts on erection, commissioning and after sales service and interest income on bank deposits and on IDBI deposits are not eligible for deduction under Section 80-I as claimed by the assessee. Therefore, these grounds of appeal of the assessee are dismissed. So far as the Bombay High Court decision is concerned, the same is relatable to words 'attributable to' as existing in the earlier provision and not 'derived from.' Therefore, the same cannot be of any help to the assessee.
16. As regards ground Nos. 5(a) and 5(b) are concerned, it is contended by the learned counsel for the assessee that the issue is covered in favour of the assessee by the decision of the Supreme Court 236 ITR 508 (sic) whereas the learned Departmental Representative relied upon the Supreme Court decisions in CIT v. Karamchand Thapar and Ors. (1996) 222 ITR 112 (SC) and 222 ITR 244 (sic) to argue that the addition made is liable to be confirmed.
17. After hearing both the sides and going through the orders of the authorities below we find that the entire facts of the case are not clear either from the order of the AO or from the order of the learned CIT(A). Therefore, we find it appropriate to set aside this issue back on the file of the AO with a direction to decide the same in the light of the Supreme Court decision on the point. Needless to mention that the AO will afford necessary opportunity of being heard to the assessee while readjudicating the matter. We hold and direct accordingly.
1. Regretting my inability to agree with the conclusions of my learned Brother JM on grounds Nos. 3 and 4, I proceed to write a dissenting order.
2. The assessee-company is engaged in the business of manufacturing gen-sets for industrial use. The normal features of a business engaged in manufacture and sale of capital goods is to ensure proper installation, commissioning and running of the equipment during the warranty period. The contract of sale invariably contains the clause regarding installation and commissioning. Though it is theoretically possible that A may manufacture and sell the equipment and B may do the installation and commissioning, but it is noted that in the assessee-company's case, there is not a single instance in last decade where the two activities were bifurcated and carried on by two different persons. A statement to this effect was made by the learned counsel Shri S. N. Inamdar in the open Court. Further, this is simply because manufacturer's warranty is involved.
3. It was never disputed before the Bench that the expression 'derived from' is narrower than the expression 'attributable to'. But that did not mean that when ten activities are so interlinked with an immediate, close and necessary nexus, that the entire activity of the undertaking which produces the profits and gains has to be regarded as one composite activity.
4. During the course of hearing before this Bench, Shri S.N. Inamdar, the learned counsel for the assessee, stressed by inviting attention to various purchase orders and invoices that the purchase orders themselves included the job of installation and commissioning for which billing was made along with the price of the equipment (pp. 6, 7, 10, 15 & 25 of paper book).
5. In response to a query from the Bench, it was also pointed out by the learned counsel that for the same capacity of gen-sets, erection charges were similar. This conclusively proved that erection activity was not undertaken as an independent and separate activity, but part of the composite activity. It was also pointed out that, though specialised, the assessee has never done any erection activity for anybody else as part of its business.
6. From the above, it is evident that the errection and commissioning which was part of the purchase order had a direct and immediate nexus with the business of the undertaking which produced the profits and gains. Thus, the case of the assessee stands supported by the following observations of the Hon'ble Bombay High Court in CIT v. Buckau Wolf New India Engg. Works Ltd. (1984) 150 ITR 180 (Bom) at p. 182 : "The manufacture of machinery by the assessee is a priority industry. The carrying out of repairs to machinery manufactured and sold by the assessee, is a activity which has a direct, nexus to the priority industry. The income therefrom must, therefore, be held to be attributable to the priority industry. The income derived from the interest paid by buyers of machinery manufactured by the assessee on deferred payment also has direct nexus to the assessee's priority industry and is attributable to it. The facility of after sales repairs and of deferred payment are intimately linked to the assessee's priority industry." 7. It is true that the expression occurring in that case was 'attributable to1 but it cannot be denied that if there is a direct nexus and intimate linking, the activity would be covered by the expression 'derived from1 also. It is also noted that the erection charges have been assessed also as part of the business profits only.
What is required by the expression 'derived from' is that the undertaking itself must be the source of the profit and not some independent activity somehow connected with the undertaking. The decision in CIT v. Wheels India (1983) 141 ITR 745 (Mad) also supports this view. Accordingly, I hold that the assessee will be entitled to relief under Section 80-I of the IT Act in respect of the income earned from erection, installation and after-sales service activity of the company which activity is very much part and parcel of the industrial undertaking. Grounds No. 3 is accordingly allowed.
8 As regards ground No. 4, the claim of the assessee is a limited one.
It was submitted by Shri Inamdar that as regards the interest charged to customers for late payment of sale price, it is nothing but extra sale price received on account of delay in payment. According to him, it is very much part and parcel of the sale activity howsoever narrowly construed.
9. As regards interest on fixed deposits, Shri Inamdar submitted, firstly, that the deposits only represent profits from the undertaking kept in normal banking channel and, secondly, such fixed deposits had to be kept with the bank as margin money to avail of credit facilities.
They are inseparable part of the undertaking. In support of this contention, he relied upon the following decisions; (ii) Pondicherry Distillers Ltd. v. ITO (1984) 20 TTJ (Mad) 410 : (1984) 8 ITD 39 (Mad) 10. Shri Rajkumar, the learned Departmental Representative relied upon the order of the learned CIT(A) and maintained that the interest income is not derived from industrial undertaking and hence not eligible for deduction under Section 80-I.11. I have considered the rival submissions and have perused the facts on record. I have gone through the details of interest. As regards the interest charged to customers for late payment of sale price, I agree with the learned counsel that it is nothing but extra sale price received on account of delayed payment. It is very much part and parcel of the sale activity and the issue is directly covered by the judgment of the Calcutta High Court in the case of Flender Macneill Gears Ltd. (supra).
12. As regards the interest on fixed deposits, a similar question came up before the Pune Bench in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (supra) and it was held that interest on the fixed deposits made by the assessee with the banks for opening the letter of credit, there was a direct nexus between the earning of interest on the fixed deposits with the bank and manufacturing activity of the industrial undertaking because the fixed deposits were made in order to open the letter of credit to facilitate the smooth running of business of manufacturing. In such a case, it was held by the Tribunal that the assessee was entitled to the deduction claimed in respect of the bank interest, if, on examination, it was found that the fixed deposits with the bank had been made by the assessee in order to obtain the letter of credit. The Bench accordingly remanded the matter back to the AO for examination of facts. A similar view has been taken again by the Pune Bench in the case of Finolex Pipes Ltd. v. CIT (supra), to which one of us (AM) was a party. Accordingly, I restore this issue to the file of the AO with the direction that he should verify the nature of fixed deposits, i.e., as to whether the deposits were kept with the bank as margin money to avail of credit facilities or for opening of letter of credit and then readjudicate upon the issue in the light of decisions of the Pune Bench in the cases of Jagdish Electronics (P) Ltd. (supra) and Finolex Pipes Ltd. (supra).
1. As there is a difference of opinion between the Members on the Bench, the following point of difference is being referred to the Hon'ble President for hearing on such point or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: "Whether, in view of the facts and circumstances of the case, the order of the CIT(A) with respect to non-allowability of deduction under Section 80-I with respect to items indicated by him can be confirmed as held by the JM or the issue is liable to be set aside to be decided afresh by the AO as per directions issued by the AM.?" 1. This appeal came before me as a Third Member to express may opinion on the following question : "Whether, in view of the facts and circumstances of the case, the order of the CIT(A) with respect to non-allowability of deduction under Section 80-I with respect to items indicated by him can be confirmed as held by the JM or the issue is liable to be set aside to be decided afresh by the AO as per directions issued by the AM ?" 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee is manufacturer of machinery. It was stated by Shri Inamdar that the assessee undertakes to install and commission the machinery as part of purchase order. The price is indicated separately for machinery and installation. The sale price is shown as sales and charges for installation and commissioning is shown as income from services rendered. During the relevant assessment year the AO denied the deduction under Section 80-I of the IT Act, 1961 (hereinafter called the Act), in respect of the following : 3. It was made clear that in respect of the first two items the learned AM allowed the deduction under Section 80-I of the Act. The learned JM disallowed. In respect of the third item the learned JM confirmed the disallowance and the learned AM set aside the addition. Both the parties agreed that the core of the controversy is to be adjudicated accordingly.
4. The aforesaid details were provided to make the question clear. The learned JM confirmed the disallowance and the learned AM allowed in respect of the first two items and set aside in respect of the third item.
5. I now proceed to deal with the issues. The deduction under Section 80-I of the Act is available to an assessee whose gross total income includes any profits and gains derived from an industrial undertaking, etc. It is stipulated under Section 80-I(2)(iii) of the Act that the eligible industrial undertaking manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule to the 1961 Act..... In short, it can be said that in order to enable the benefit of Section 80-I of the Act, the assessee must derive income from manufacturing or production of any article or thing, not being any article or thing specified in the list in the Eleventh Schedule to the 1961 Act.
6. The pertinent question is what is the implication of the word "derived". The dictionaries state that the word "derive" is usually followed by the word "from", and it means : get or trace from a source, arise from, originate in, so the original or formation of. As a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word "democracy" is derived from the Greek word "demos", the people, and most dictionaries will so state. That is the ordinary meaning of the words "derived from" and there is no reason to depart from that ordinary meaning here.
7. In the case of Fryer v. Morland, 45 LJ Ch. 820, Justice Jessel, MR said : "how can you say that the interest of the purchaser is 'derived from' the vendor. He does not derive his interest from the vendor, he derives it from his own money which brought the property. You would not say, if you were talking of a horse you had bought, that you derived your interest in that horse from the horse dealer. You would say you bought it with your money." 8. It is, therefore, evident that the term "derive" connotes to draw or receive or obtain as from a source or origin. The deduction under Section 80-I of the Act is to be allowed with reference to the profits and gains derived from an eligible industrial undertaking. The expression "derived from" has a definite, but narrow meaning and it cannot receive a flexible or wider concept. If a word or expression has received judicial interpretation by the highest Court and thereafter, it is found to have been used in the legislative enactment, it must be presumed that the legislature must have used that word or expression with the same meaning as judiciously determined unless the context apparently requires any other meaning.
9. The next word, which is important to understand the implication of the section, is "manufacture". The word "manufacture" is a compound word of Latin origin derived from the words "manu", by hand and "facere", to do, to make, to form. But the meaning is not confined to that which is done by hand alone, but by machinery as well.
Lexicographers defined "manufacture" to be the process of making anything by art, or reducing materials into a form fit for use by the hand or by the machinery. Manufacture is a transform or fashioning of the raw materials into a change of form for use. The functions of commerce are different. The buying, selling and the transportation incidental thereto, constitute commerce and the regulation of commerce.
Etymologically the word "manufacture" is defined as the process of making anything by art, or reducing material into a form fit for use by the hand or by machinery; anything made or manufactured by hand, or manual dexterity or by machinery. As a verb, the word is defined as meaning to form by manufacture, or workmanship, by the hand or the machinery, to make by art and labour. Manufacture is the application, to material, of labour or skill, whereby the original article is changed to a new, different and a useful article, provided the process is of a kind popularly regarded as manufacture. In the Century Dictionary the word "manufacture" is defined as the production of article for use from raw or prepared materials, by giving these materials new forms, qualities, properties or combinations, whether by hand, labour or machinery.
10. The other word is "produce". The word "produce" has not got any exact legal meaning but which requires to have an interpretation placed upon.it in the statute in which it is used.
11. Under Section 80-I of the Act, the word "produce" is used in the context of article or thing. The word "produce" when used in justaposition with the word "manufacture", it connotes in bringing into existence new goods by a process which may or may not amount to manufacture.
12. Many precedents cited pro et con (for the against) to explain the word "derive" in the context of the facts of the present case. I now proceed to deal with the precedents.
13. In the case of Orissa State Warehousing Coloration v. CIT (1999) 237 ITR 587 (SC), the Hon'ble Supreme Court was concerned with the interpretation of Section 10(29) of the Act. The prerequisite for the entitlement apropos the claim for exemption was the income derived from letting out of godowns, etc. The apex Court held that the legislature was careful enough to introduce in the section itself, a clarification by using the words "any income derived therefrom", meaning thereby obviously for marketing of commodities by letting out of godowns or warehouses for storage, processing or facilitating the same. If the letting out of godowns or warehouses is for any other purpose, the question of exemption would not arise. Section 10(29) of the Act is categorical in its language and this exemption is applicable only in the circumstances as envisaged under the section. The word "any income" as appearing in the body of the statue is restrictive in its application by reason of the user of the expression "derived from". If the legislature wanted an unrestrictive exemption the same would have used "any income" without any restriction so as to make it explicit that the entire income of the assessee would be exempt. Having due regard to the language used, the question of exemption would arise pertaining to that part of the income only which arises or is derived from the letting of godowns or the warehouses and for the purposes specified in the section.
The Hon'ble Supreme Court has further held that a fiscal statute shall have to be interpreted on the basis of the language used therein and not de-hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe the natural and ordinary meaning to the words used by the legislature and the Court ought not, under any circumstances, substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions, By reason of the clarity of expression, the question of there being any integrated activity being except within the meaning of Section 10(29) of the Act does not and cannot arise.
14. The meaning of the word "integrated" as given in the Chambers Twenty First Century Dictionary is to fit (part) together to form a whole. That means an activity that forms part of the main activity is an integrated activity.
15. In the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC) the Hon'ble apex Court has held that 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". In this case the assessee was engaged in processing prawns and other seafood which it exported. It also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee was entitled to use the import entitlements that it had earned to others.
Its total income included the sale proceeds from such import entitlements. Relief under Section 80HH of the Act was claimed on such sale proceeds. The apex Court held that the source of import entitlements could only be said to be the Export Promotion Scheme whereunder the export entitlements became available. There must be, for the application of the words "derived from", a direct nexus between the profits and gams and the industrial undertaking. In this case the apex Court found that the nexus was not direct but only incidental. As such, the exemption was denied.
16. In the case of Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC), the apex Court has held that the word "derived" is not a term of art.
Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In this case the assessee exported groundnut oil which resulted in loss. However, for the exports made at a loss, the assessee was rewarded with import entitlements. It utilised the import entitlements in purchasing palm oil from foreign countries. The imported palm oil was consumed internally by the assessee for manufacturing other products. The contention of the assessee was that the oil, which was purchased by the assessee from foreign countries on the strength of the import entitlement, was at a rate much lower than the rate obtaining in the Indian market for similar products. Since the assessee paid a lower price for the imported palm oil, the assessee made a larger profit than it would have made had it purchased palm oil locally at a higher rate. The assessee, therefore, claimed that it would be entitled to the benefit of Section 2(5)(i) of Finance (No. 2) Act, 1962, in respect of the -amount of profit it made in excess of what it would have otherwise made, if it had to buy palm oil locality.
Under the provisions of Section 2(5)(i), an assessee whose "total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction from the amount of income-tax and super-tax with which he is chargeable at the specified percentage." Hon'ble Supreme Court has held that in this case 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 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.
17. In the case of CIT v. Cement Distributors Ltd. (1994) 208 ITR 355 (Del) it was held that the word "derived" has to be assigned a restricted meaning as compared to the words "attributable to" or "referable to" and, therefore, to avail of a rebate under Section 80HH of the Act, an assessee must establish that he has derived profits or gains form an industrial undertaking. In other words, the industrial undertaking must itself be the source of that profit and gain and it is not sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking.
The cardinal rule of interpretation is that the statute must be construed according to its plain language and neither should anything be added nor should something be subtracted therefrom unless there are adequate grounds to justify the inference that the legislature clearly so intended. It is also well-settled that in a taxing statute one has to look merely at what is clearly stated. The meaning and extent of the statute must be collected from the plain and unambiguous expression used therein, rather than from any notions, which may be entertained by the Court as to what is just or expedient.
18. I find that there is no ambiguity in the provision. If would, therefore, not be apt to follow the purposive theory of interpretation.
The word "derived" cannot be construed on the pattern of the word "attributable". There is ample authority on the proposition that the word "derived" is narrower in application comparing with the word "attributable". Keeping all those norms as are set out in the precedents cited above, I now decide the issues on the factual matrix of the case.
19. In the context of service charges for erection and commissioning, the learned counsel for the assessee placed reliance on the decision rendered in the case of CIT v. Buckau Wolf New India Engineering Works Ltd. (1984) 150 ITR 180 (Bom), In this case the Hon'ble High Court has held that profits from matching charges for repairs to machinery and interest on unpaid sale proceeds of machinery are attributable to priority industry. These were held eligible for deduction under Section 80-I of the Act. The Court held that carrying out of repairs to machinery manufactured and sold by the assessee was an activity, which had a direct nexus to the priority industry. This decision was rendered when the word used in the statute was "attributable to" and not "derived form". Direct nexus is necessary only when the requirement of the section is that income must be attributable to integrated and connected activities find no place where the term used is "derived from". As such, this decision is of no relevance to decide the present issue.
20. Next reliance was placed on the decision of the apex Court rendered in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC). In this case it is clearly laid down that the legislature has deliberately used the expression "attributable to", having a wider import than the expression "derived from", thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry. As such, the ratio of this decision is not relevant for deciding the issue.
21. It transpires from the perusal of the details that the service charges were recovered from services rendered by the assessee-company's engineer outside the assessee's factory. Service activity could be construed to be integrated or connected activity with the activity of manufacturing. But it was not a manufacturing activity. Separate bills were issued for the service charges. The amount of service charges is not included in the sales bill. As such, in my opinion, this cannot be construed to be a manufacturing activity. 1 agree, with the conclusion of the learned JM on this count.
22. The next issue relates to the interest received from the customers for delayed payment. Reliance was placed on the decision rendered by the Hon'ble Calcutta High Court in the case of CIT v. Flender Macneill Gears Ltd. (1984) 150 ITR 83 (Cal). In this case interest was charged to facilitate prompt payment of bills. Hon'ble Calcutta High Court has held that interest was directly attributable to earning of profits and gains. It was held to be business income and the benefit of Section 80-I was given to the assessee.
23. I find a recent decision of Hon'ble Madras High Court in the case of CIT v. Madras Motors Ltd. (2002) 257 ITR 60 (Mad). In this case the Hon'ble High Court has held that interest received on belated payments for goods exported are directly relatable to the business of the assessee. Same logic applies over here. No contrary decision was brought to my knowledge. I, therefore, respectfully following the precedent, decide this issue in favour of the assessee. I agree with the conclusion of the learned AM on this count.
24. Lastly, the allowability of interest from FDR was argued. In the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad) it was held that interest was not profit derived from industrial undertaking.
As such, it should not be taken into account in computing special deduction. This decision was rendered in the context of interest on deposits with Electricity Board made out of statutory compulsion.
25. In the case of CIT v. Menon Impex (P) Ltd. (2003) 259 ITR 403 (Mad) it was held that interest received on deposits is not derived from exports. In this case the deposit was made in bank for opening letters of credit.
26. In the case of South India Shipping Corporate Ltd. v. CIT (1999) 240 ITR 24 (Mad) interest was paid on overdraft taken for business.
Hon'ble High Court has held that this interest is not to be deducted from interest on bank deposits.
27. The apex Court in the case of CJT v. Dr. V.P. Gopinathan (2001) 248 ITR 449 (SC) has held that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposits.
28. In the case of Pandian Chemicals Ltd. v. CJT (2002) 254 ITR 562 (Mad) it was held that interest receipts and income from sale of scrap and gunny bags do not qualify for special deduction.
29. Having regard to the facts and considering the precedents discussed herein-before, I am inclined to agree with the learned JM on this point.
30. In the result, in respect of service charges for erection and commissioning and interest received from FDR made with the bank, I am inclined to agree with the learned JM and in respect of interest received from customers on delayed payment, I am inclined to agree with the learned AM.31. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
1. As there was a difference of opinion between the AM and the JM, following question was referred to a Third Member: "Whether, in view of the facts and circumstances of the case, the order of the CIT(A) with respect to non-allowability of deduction under Section 80-I with respect to items indicated by him can be confirmed as held by the JM or the issue is liable to be set aside to be decided afresh by the AO as per directions issued by the AM ?" 2. The learned Vice-President, Shri M.K. Chaturvedi, sitting as Third Member by his opinion dt. 7th March, 2003, has concurred partly with the view of AM and partly with JM. In accordance with the majority view, we hold that the assessee is not entitled to deduction under Section 80-I of the Act in respect of (i) service charges for erection and commissioning of machinery, and (ii) interest received from FDR made with the bank, and so far as interest received from customers for delayed payment is concerned, we hold that the assessee is entitled to deduction under Section 80-I on this item and other part of the order remains unchanged.