1. This is assessee's appeal directed against the order 'passed by the learned CIT(A)-III, Pune, dt. 17th Feb., 1995, relevant to asst. yr.
1991-92, wherein in all five grounds have been raised. Ground Nos. 1 and 2 have not been pressed as per written communication, dt. 27th July, 2001, filed on behalf of the assessee. Therefore, the same are dismissed. Ground Nos. 4 and 5 being general in nature, call for no adjudication. Therefore, the only ground survives is ground No. 3 which reads as under : "The disallowance under Section 80-I of the IT Act, 1961, at Rs. 11,818 only being 20 per cent of Rs. 59,087 i.e., income on interest on deposit with bank--it is submitted with respect that the facts and the issue involved in the Ground No. 3 are duly covered as per ratio decided in case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune) followed in case of Finolex Pipes Ltd. v. Dy. CIT (2000) 68 TTJ (Pune) 422. As such a due relief may please be granted in this behalf." 2. In terms of notice of hearing sent to the assessee, the assessee filed written submissions and while seeking leave for dispensing with personal hearing, assessee requested for consideration of the written submissions while disposing of the appeal.
3. The relevant facts are that the AO excluded the amount of interest of Rs. 59,087 on fixed deposits for calculation of deduction under Section 80-I even though the same is assessed under the head 'income from business' which was claimed that this was incorrectly done and additional deduction under Section 80-I of Rs. 11,818 being 20 per cent of the amount of Rs. 59,087 be allowed. It was explained in appeal proceedings that the assessee-firm had availed financial facility of cash credit from bank of India, At the instance of the bank, for availing such financial facility of cash credit, the assessee had to maintain fixed deposits with the bank which had been offered as security for cash credit facility. The interest income of such fixed deposits have been excluded by the AO from the income taken into consideration for deduction under Section 80-I. It was held that this income is considered as 'Income from business' as it is earned and accrued in the ordinary course of business and relates to the business.
In the alternative, it was submitted that such income could have been considered as independently earned by the partners, whereby the deduction under Section 80-I could have been availed of by them. It was argued that the said income is considered as income related to the business of the assessee and not as income from other source, and therefore, it is unjust to consider the said income as not related to industrial undertaking, The assessee has also relied on the decisions CIT v. Motilal Hitabhai Spg. & Wvg. Co. Ltd. (1978) 113 ITR 173 (Guj) and Snam Progetti S.P.A. v. Addl. CIT (1981) 132 ITR 70 (Del) to press its claims.
4. The learned CIT(A) while considering and rejecting the plea of the assessee has concluded in para 6.2 of her order as under : "The appellant's arguments have been considered. It was pointed out to the appellant that the deduction under Section 80-I relates to profits and gains derived from an industrial undertaking. The word 'derived' is of vital significance and it has been interpreted in the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) wherein in connection with the computation of deduction allowable under Section 80E, the words used were 'the profits attributable to the priority industry' and it was held that the legislature deliberately used this expression since it had a wider import than the expression 'derived from'. The latter expression was more' restrictive and confined to the industrial activities itself. In view of this decision of Supreme Court, the application of the decision of Gujarat High Court cited by the appellant's representative is not correct as Gujarat High Court had not taken into consideration the decision of Supreme Court referred above. In the circumstances, the computation of deduction under Section 80-I by excluding the interest on the fixed deposits from the computation of profits of industrial undertaking was correctly made by the AO and the appeal on this point is dismissed." 5. Aggrieved by this order of the learned CIT(A), the assessee is in appeal.
6. The learned Departmental Representative while relying upon the orders of the authorities below has pleaded for confirmation of the impugned order. The question before us is whether the amount of interest of Rs. 59,087 on fixed deposits with the bank can be considered as income derived from industrial undertaking in order to entitle the assessee to get deduction under Section 80-I on this amount when such fixed deposits had been offered as security for cash credit facilities availed of by the assessee. Further, to give background of the provision is this regard it would be relevant to point out that earlier Section 80-I was introduced by replacing Section 80E in which initial deduction was allowed out of profits and gains attributable to priority industry. This section was also deleted w.e.f, 1st April, 1973, and the present section was brought on the statute book by Finance (No. 2) Act, 1980, w.e.f. 1st April, 1981. The distinguishing feature of the earlier Section 80-I and the existing one is that earlier the expression 'profit attributable to priority industry' was on the statute book while in the existing provision legislature has used expression 'any profits and gains derived from industrial undertaking or a ship or from hotel........'. The controversy had since been going on behalf 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 (1978) 113 ITR 84 (SC), 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' occurring 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." 6.1 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 from' has a definite but narrow meaning and it cannot receive a flexible or wider concept.
7. To the same effect, Hon'ble Madras High Court in the case of CIT v.Jameel Leather Suppliers (2000) 246 ITR 97 (Mad) has 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. (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 connection are irrelevant from the preposition of 'derived from'.
8. 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 SLP filed by assessee has since been rejected as reported in (2001) 248 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].
9. To the same effect, in order to arrive at the conclusion, Hon'ble Madras High Court has followed the ratio of the above judgment of Pandian Chemicals Ltd. (supra) in the case of Fenner (I) Ltd. v. CIT.10. 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. (supra) decided the controversy in respect of claim of the assessee under Section 80HH on the profit earned from sale of import entitlements against the assessee after observing at p. 584 as under: "We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food: By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking." 11. After taking into consideration the ratio of the judgments as noted above, now we advert to the facts of the present case. We find that the assessee claimed deduction under Section 80-I and included in its claim, for arriving at the amount of deduction, interest income from fixed deposit with the bank, obtained for the purposes of availing overdraft facilities. Since the claim included interest income on fixed deposits and in view of ratio of decisions as cited above and particularly the Madras High Court decision in the case of Pandian Chemicals Ltd. v. CIT, SLP (Civil) No. 8014 of 2000 has also been rejected as noted in earlier part of this 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 not found that industrial undertaking is 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, interest derived from fixed deposits with the bank for availing of overdraft facilities which was the direct source of that income cannot be said to have been derived from the industrial undertaking. Accordingly, we hold that merely because some of the deposits on which interest was received were used for getting overdraft facilities or held as security for the same, it cannot be said that the said income was the eligible profit of the industrial undertaking for the purposes of deduction under Section 80-I. So far as the reliance placed by the assessee on the decisions of Pune Bench of the Tribunal in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 JTD 542 (Pune) and Finlex Pipes Ltd. v. Dy. CIT (2000) 68 TTJ (Pune) 422, we find that those decisions have been rendered prior to considering the various High Court decisions as considered by us in the earlier portion of this order. Therefore, we prefer to rely upon Supreme Court and various High Court decisions including that of Madras High Court in the case of Pandian Chemicals Ltd. cited supra in order to arrive at conclusion. In view of the facts and circumstances, case law as discussed and relevant provisions of law, we hold that the action of the authorities below is justified in not allowing the relief as claimed by the assessee. As a result, the order of the CIT(A) in this regard is confirmed. Therefore, this ground of the assessee also gets dismissed.