1. Present appeals are filed by the Revenue against the order of CIT(A), dated 22nd September, 1994 for the assessment years 1987-88, 1988-1989 and 1990-1991.
The grievance of Revenue was against treatment of interest on bank deposits as business income and thereby eligible for deduction under Sections 32AB, 80HH and 80-I of the Income-tax Act, 1961.
The assessee is an Industrial Undertaking engaged in the manufacturing of electrical towers against the orders of Assam State Electricity Board (ASEB). During the course of its business for manufacturing of towers, it got advance payment from ASEB for execution of its orders.
The assessee put part of the advances received from ASEB in Bank as fixed deposit for procuring bank guarantees against the same. Assessee also availed overdraft facilities from the Bank against such deposits.
Assessment completed under Section 143(1) was set aside by CIT under Section 263, on the ground whether interest received from fixed deposit could be attributed and the business activities of the assessee and if the investment had been made in the course of and for the purpose of the business. As such, the order was set under Sections 263 to reconsider the point for entitlement of deductions under Section 80HH for the assessment year 1987-1988 and under Section 32AB and 80-I for the assessment years 1988-1989 and 1990-1991. Before the Assessing Officer, it was contended by the assessee that fixed deposit along with interest thereon has been utilised for the purpose of industrial activities of the assessee's company. A certificate from the United Bank of India was also filed which showed that the assessee-company had a fixed deposit with the Bank which had been credited out of mobilising advance received from State Electricity Department against Bank guarantee. The Assessing Officer declined assessee's claim by observing that deduction under Section 80HH/80-I is allowable on the income derived from "Industrial Undertaking" only and deduction under Section 32AB is allowable on the income derived from profit an gains of business and profession. Hence, the income from other sources, i.e., interest income in no way qualify for this deduction. The Assessing Officer held that allowability of deduction depends on source of income and in the instant case, the assessee could not prove that interest from fixed deposit is not an income from other sources. Hence, the assessee's claim was rejected under Sections 80HH, 80-I and 32AB in respect of interest income from Bank.
2. In the impugned order, the CIT(A) observed that the undisputed fact that remains in this case is that the fixed deposit in question has been created out of advances received in connection with business activities and a certificate of the Bank to this fact is also on record. The interest income so earned has also been ploughed back into Bank account and utilised for the purpose of the business. The Assessing Officer has not brought any material on record to controvert the above facts. It is, therefore, very much evident that the fund in question was the business fund and the income accruing therefrom by way of interest has also been utilised for the purpose of business namely manufacturing of electrical tower. Even the overdraft, obtained against the fixed deposit are also utilised for the purpose of business. The CIT(A), therefore, allowed the assessee's claim. Against the impugned order of CIT(A), the revenue is in appeal before us.
3. The ld. Authorised Representative vehemently argued that interest received was inextricably linked with the carrying on of the business.
The advance from ASEB was received for manufacture of towers and the same was put in the Bank for availing Bank guarantee and overdraft facility against the same. It was argued that Bank guarantee was required to be furnished in the course of business, which is not available from Bank without giving fixed deposit to the Bank. A Bank certificate to this effect was also furnished to the Assessing Officer in the course of assessment under Section 143(3)/263. The certificate clearly stipulate that "fixed deposit with the Bank have been created out of Mobilisation Advances from State Electricity Department against our Bank Guarantees". The Authorised Representative further placed reliance on the following judgments :- (i) Honda Siel Power Products Ltd. v. Dy. CIT [2000] 69 TTJ (Delhi) 97;Associated Flexibles & Wires (P.) Ltd. v. Dy. CIT [1999] 64 TTJ (Pune) 839;CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535 : [1996] 87 Taxman 1 (Mad.); 5. On the other hand, the ld. Departmental Representative strongly objected to the arguments put forward by the ld. A.R. He further placed strong reliance on the order of the Assessing Officer and reliance was also placed on the following decisions :- (iii) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 : 93 Taxman 502 (SC).
6. We have heard and considered the rival submissions, perused the material facts on record. We have also perused the various case laws relied upon by both the parties. The main thrust of the issue is that in order to be eligible source of income, there must be direct and proximate nexus between the profits derived and the activity of the industrial undertaking. In the instant case, Bank deposit is inextricably linked with and is directly incidental to the carrying on of the business of the industrial undertaking. The assessee was compelled to make fixed deposits to obtain the Bank guarantee and overdraft facilities against the same, without which it could not have run the show smoothly, i.e., industrial undertaking. During the relevant assessment years, the assessee has received interest on FDR and paid interest on overdrafts as follows :-Interest received Rs. 7,47,601 Rs. 9,27,575 Rs. 14,37,568on F.D.R.Interest paid on Rs. 9,60,148 Rs. 8,17,650 Rs. 14,71,643Overdraft The above chart indicates that in all the years except assessment year 1988-1989, the interest paid on overdraft is more than interest received on FDRs. All the above deposits were made out of advances received in the course of business of manufacturing towers from State Electricity Board. The interest earned on the deposit had also been ploughed back into Bank account and utilised for the purpose of the business.
A certificate from the Bank to above effect was also procured by the Assessing Officer during the course of assessment. The Assessing Officer has not brought any material on record to controvert the above facts. Even for a moment, if it is assumed that fixed deposit had been adjusted against the overdraft, the net effect on the profit of industrial undertaking would have remain more or less same because in all the years interest paid on overdraft facility availed against security of fixed deposit, is more than the interest received on FDR except the assessment year 1988-89. The Assessing Officer also failed to bring any material on record that Bank guarantee availed against the fixed deposit was not required to be furnished by the assessee nor that Bank guarantee, was available to the assessee without offering any fixed deposit as a security to the Bank. On the face of it appears that interest receipt and interest payment are two, but actually it is an arrangement only to facilitate the industrial undertaking in procuring Bank guarantee and overdraft facilities against the security of fixed deposit. The liability side of audited balance-sheets of respective years placed in the paper book also establish the fact that loan from Bank has been availed against the security of Bank deposits. The assets side of the Balance-sheet reflect the deposit with Bank for procuring Bank guarantee required to be furnished to ASEB. In view of the above observations, we are of the considered view that fixed deposit with the Bank was inextricably linked with and is directly incidental to the carrying on of the business of the industrial undertaking by the assessee. The claim of the assessee under Sections 80HH, 80-1 and 32AB on the profit of undertaking inclusive of interest income was within the frame work of law, insofar as, both receipt and payment of interest are for the purpose of business. Moreover, interest on fixed deposit made by the assessee with the Bank for furnishing Bank guarantee, 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 deposit was made in order to procure Bank guarantee to facilitate the smooth running of the business of manufacturing. For grant of overdraft facility and Bank guarantee, the Bank normally insist for deposit. Thus such deposit with the Bank on the facts and circumstances of the case is out of business compulsion, therefore, income in the form of interest received on such deposit is business income and not income from other sources.
It was held by Pune, ITAT in Dy. CIT v. Jagdish Electronics (P.) Ltd. [1998] 66 ITD 542, that interest on fixed deposit made by the assessee with the Bank and 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 the business of manufacturing. Same view has been taken in Kinetic Honda Motor Ltd. v. CIT [2001] 72 TTJ (Pune) 72. Similarly, Calcutta High Court in CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252 observed that where the company utilised its commercial assets which were lying in the form of surplus cash, for earning interest, the interest arises from the utilisations of commercial assets only and would, therefore, be business income.
Madras ITAT in Ambika Cotton Mills Ltd. v. Joint CIT [2001] 71 TTJ 871, observed that interest earned with reference to deposit and guarantees given to the Electricity Board for providing the assessee necessary power for running its factory, is eligible for deductions under Sections 80HH and 80-I. Let us now examine the ratio of decisions relied on by ld. D.R. Jurisdictional Gauhati High Court in case of North East Gases (P.) Ltd. (supra) held that interest on Bank deposit and profit on sale of fixed assets earned by new industrial undertaking did not come within the scope of "profits and gains of business" but under the head "Income from other sources". In this case, there was no nexus between the making of fixed deposit and activity of industrial undertaking. No bank guarantee nor overdraft limit was sought in this case. Whereas in the instant case fixed deposit was given for availing Bank guarantee and overdraft limit there against. Without obtaining Bank guarantee from Bank, it was not possible to procure Govt. orders and Bank deposit was required to be furnished to be Bank as security for procuring Bank guarantee. Similarly, Bank overdraft was availed on the security of Bank deposit. Thus instant case in distinguishable on facts.
Ld. D.R. also relied on Hon'ble Supreme Court decision in the case of Sterling Foods (supra). In this case, profit on sale of import entitlement, entitlement was held to be not derived from industrial undertaking, therefore, not includible in income for computing special deduction under Section 80HH. In this case, the nexus was not direct but only incidental. This case is distinguishable from the instant case insofar as no Bank guarantee or overdraft was required to run industrial undertaking.
In this case, interest earned on borrowed funds prior to commencement of business was held to be "income from other sources". Whereas, in the instant case, the deposit was given out of business receipts in the course of carrying on the business of industrial undertaking and interest was earned thereon. Thus instant case is distinguishable on the facts and circumstances of the case cited by ld. D.R.Saraf Textile Industries v. CIT [1996] 217 ITR 507 : 85 Taxman 146 (Raj.) :- In this case, the assessee-company was incorporated but did not commenced business. Interest earned on deposit was treated income from other sources. The instant case is distinguishable from this case, as the business was already commenced and interest was earned in the course of business.
There is a cleaverge of judicial opinion on the subject of treatment of interest income and eligibility of deductions under Sections 80HH, 80-I and 32AB.Even if two views are possible in this respect, view in favour of the assessee is to be accepted. Reliance is placed on :- CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC). It is an accepted principles of law that fiscal statutes have to be constructed strictly in favour of the assessee, when meaning is doubtful or ambiguous. Fiscal statutes must be interpreted strictly in favour of the subject. The Court is not justified in straining the language of a particular provisions in order to hold a subject liable to tax. If a section in taxing statute is of doubtful and ambiguous meaning, it must be resolved in favour of the subject. It has been held by the Hon'ble Supreme Court in the case of CED v. R. Kanakasabai [1973] 89 ITR 251 that if a taxing provision is ambiguous and is reasonably capable of more than one interpretation, that interpretation which is beneficial to the subject must be adopted. It is not permissible for the Court to read into a taxing provision any words which are not there or exclude words which are there. The words found in the provision must be given their natural meaning. Again the Supreme Court held in the case of CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 that if a provision of taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee has got to be accepted.
In view of the above discussion and in the light of various judicial pronouncements and due to the fact and circumstances of the case, where net interest income (if any) was earned in course of carrying on the industrial undertaking and the same is inextricably linked with operations of the industrial undertaking, the same is income derived from industrial undertaking and hence, eligible for deduction under Sections 80HH, 80-I and 32AB.7. Therefore, on the facts and circumstances of the case, we are of the considered opinion that there was direct nexus between the Bank deposit, earning of interest and industrial undertaking.