1. These are many cases involving the interpretation of Sections 80HH and 80-I. They were heard together and are being disposed of by this common order. Besides raising some interpretational aspects and rules of consistency, the following receipts are claimed to be profits and gains derived from industrial undertaking and entitled to deductions under these Sections 80HH & 80-I:- (i) Interest recovered from debtors for late payment of the sale price; (iii) Interest from IDBI on deposits required under Section 32AB of the Act; (iv) Interest from the sarafi and bank on deposits out of initial/surplus funds; (v) Insurance claim receipts for reimbursement of losses; (vi) Sale of scrap, spare parts, sale of raw material & misc. Receipts.
2. We shall deal with the preliminary arguments. On the rules of interpretation of statute, Mr. S.N. Soparkar submitted that while interpreting the provisions as regards deduction, if two views are possible, the view in favour of the assessee should be adopted and in this connection ten decisions of the Supreme Court have been referred to starting from CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC) to Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 : 106 Taxman 166 (SC). In principal we agree with the Id. Counsel and say that there cannot be any doubt about the proposition but subject to the following observation of the Supreme Court in Escorts Ltd. v. Union of India [1993] 199 ITR 43 : [1992] 65 Taxman 420 (SC): In our view, there was no difficulty at all in the interpretation of the provisions. The mere fact that a baseless claim was raised by some overenthusiastic assessee who sought double allowance or that such claim may perhaps have been accepted by some authorities is not sufficient to attribute any ambiguity or doubt as to the scope of the provisions as they stood earlier'. It would thus be imperative that when a provision is clear as to its scope, that interpretation is to be adopted irrespective of the acceptance of a contrary view by some authority and raised by an assessee.
3. Another preliminary contention was that when the matter is covered by the decision of Ahmedabad Bench of the Tribunal in the case of Inductotherm (India) Ltd. v. Dy. CIT [2002] 75 TTJ (Ahd.) 728, the subsequent Bench is bound to follow that order in view of the Gujarat High Court decision inSayaji lron & Engg. Co. v. CIT [2002] 253 ITR 749 : 121 Taxman 43 and that the subsequent Bench in the case of Bio Pharma v. Dy. CIT [2002] 75 TTJ (Ahd.) 486 could not have deviated from the earlier view and if it decided not to accept the earlier order, it ought to have referred the matter to a Special Bench. It does not permit the revenue to rely on the said subsequent order. If the Bench of the ITAT did not follow its earlier binding order, the same is required to be ignored. For this proposition the Supreme Court decision in the case of Indian Oil Corporation Ltd. v. Municipal Corporation AIR 1995 SC 1480 was referred to.
4. We do not find any merit in this contention of the assessee. We find that the decision of Inductotherm (India) Ltd. (supra) is dated 13th December, 2001 and there was a decision of the Ahmedabad Bench itself even prior to that in the cases of two of the assessees before us, namely, Shri Amarsinhji Stationery Industries Ltd. [IT Appeal No. 4078 (Ahd.) of 1994 dated 10-5-2000] and Kalpataru Power Transmission Ltd. [IT Appeal No. 2700 (Ahd.) of 1995 dated 4-7-2001] taking a view on the line of Bio Pharma (supra). The proposition of the Counsel itself, therefore goes against the assessees. Be that as it may, in Sayaji Iron &Engg. Co.'s case (supra), it was found on the facts that the Tribunal's earlier order in the assessee's own case was distinguished by giving reasons which were, to say the least, unwarranted. The Gujarat High Court agreed with the following observations of the Madras High Court in the case of CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.).
No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constitute the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities.
If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single judge takes a view different from the one taken by another judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly, if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by the earlier Bench, it should place the matter before the President of the Tribunal so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the Income-tax Act itself.
5. It is true that a judicial officer including the Tribunal would not be justified or has any right or jurisdiction to come to a conclusion entirely contrary to or different from the one reached by it on the same facts and if that be allowed to happen that will not sake the confidence of the public in judicial procedure as such, it would be destructive, of the institutional integrity itself. The Sayaji Iron & Engg. Co.'s case (supra) decision of the Gujarat High Court is however of no much help in these cases. Firstly, because the observations were vis-a-vis assessee's own case in earlier year whereas the present assessees are different one; secondly, because Sayaji Iron & Engg.
Co.'s case (supra) was a case of a different view taken on facts, that too on same facts whereas in present cases the question involved is not only on facts or so to say same facts but a question of interpretation of provision of statute is also involved, and thirdly, because the High Court has found on the facts that the Tribunal's earlier order in the assessee's own case was distinguished by giving reasons which were, to say the least, unwarranted. The decision in our opinion is not an authority for the proposition that in no circumstances a decision taken in a case or even in one year of the same assessee cannot be deviated from in another case or another year of the same assessee. Whenever new facts appeared subsequently in another case(s) or another year(s), different view(s) taken in that case(s) or year(s) have been upheld by the courts time and again.
6. We may cite a few cases on the issue. One is in the case of CIT v.Motilal Hirabhai Spg. & Wvg. Co. Ltd. [1978] 113 ITR 173, the Gujarat High Court held that the doctrine of res judicata is not applicable to income-tax proceedings and this issue was discussed at page 182 of the report as under :- The Tribunal noted that for a number of years the assessee had returned the income derived by it as and by way of interest under the head "other sources" and that it was assessed accordingly. It, however, proceeded to observe that the principles of estoppel and res judicata were not applicable to income-tax proceedings and that, therefore, the matter had to be viewed in the light of the facts and circumstances brought on record, so far as the assessment year in question was concerned. We do not think any objection could be taken to the approach of the Tribunal, so far as this particular aspect is concerned.
7. Another case we find in the case of Dwarkadas Kesardeo Morarka v.CIT [1962] 44 ITR 529 the Supreme Court observed as under :- The conclusion of the Tribunal was amply supported by evidence. It cannot be said that because in the previous years the shares were held to be stock-in-trade, they must be similarly treated for the assessment year 1949-50. In the matter of assessment of income-tax, each year's assessment is complete and the decision arrived at in a previous year on materials before the taxing authorities cannot be regarded as binding in the assessment for the subsequent years. The Tribunal is not shown to have omitted to consider the material facts. The decision of the Tribunal was on a question of fact and no question of law arose which could be directed to be referred under Section 66(2) of the Income-tax Act.
8. Again see in the case of CIT v. Brij Lal Lohia & Mahabir Prasad Khemka [1972] 84 ITR 273 (SC), the Supreme Court at page 277 observed as under : The fact that in the earlier proceedings, the Tribunal took a different view of those deeds is not a conclusive circumstance. The decision of the Tribunal reached during those proceedings does not operate as res judicata. As seen earlier there was a great deal more evidence before the Tribunal during the present proceedings, relating to those gift deeds.
9. The Supreme Court decision in the case of Indian Oil Corporation Ltd. (supra) relied upon by the Id. counsel of the assessee is also in our opinion, of no help to the assessees. In this case, the Supreme Court observed "That the Division Bench of the High Court in Municipal Corporation was clearly in error in taking the view that the decision of this court (Supreme Court) in Ratnaprabha was not binding on it. In doing so, the Division Bench of the High Court did something which even a later co-equal Bench of this Court did not and could not do. The view taken by the Division Bench of the High Court in Municipal Corporation proceeds on a total misunderstanding of the law of Presidents and article 141 of the Constitution of India . ..." It was in these circumstances it was observed by Their Lordships of the Supreme Court that the High Court has done a thing which even a co-equal Bench of the Supreme Court could not do. It is, in our opinion, not an authority for the proposition that if the subsequent Bench of the ITAT did not follow the earlier order of the ITAT, the same is required to be ignored.
10. In a recent decision of Hemalatha Gargya v. CIT [2003] 259 ITR 1 the Supreme Court held that given "just cause" the Department could challenge subsequently the interpretation which was given in an earlier decision. It accepted the submission of the revenue that the decision of the other High Court holding to the contrary as well as the subsequent conflicting decision of the very Punjab and Haryana High Court decision would itself would come within the phrase "just cause".
In this case, Their Lordships considered its earlier decisions in the case of Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219 : 117 Taxman 375 and Union of India v. Satish PanalalShah [2001] 249 ITR 221 : 117 Taxman 373 and observed that these decisions do not hold that the revenue can never challenge an interpretation which they have not chosen to do so earlier. This is an indication of a proposition that there is no bar for taking a different view and such a different view could be taken by showing a just cause and conflicting decision by itself and a contrary decision of another court by itself would be such a "just cause".
11. From the above it is clear that an earlier order of co-ordinate bench has a great persuasive value and it should not ordinarily be deviated from. This principle however, is subject to certain limitations, namely, (i) the facts are same, (ii) no new facts are brought on record, (iii) no change in the circumstances under which the decision was reached is there, (iii) there is no decision of a higher court, or (v) there is no change in the statutory provision of law. A decision reached on particular facts and on consideration of the law prevailing at that time can be deviated from it some new facts are brought on record or some more cases of higher courts on the subject have come to its notice. It would be justified and indeed under a duty to take a view commensurate to the new development and also because each year and each assessee is a separate year and a separate assessee and the principle of res judicata and estoppels did not apply to income-tax proceedings even though the department is one and also because in the earlier order some of the decisions of Supreme Court and the High Court were not considered.
12. On merits, in ITA No. 4085 /Ahd./1996, the dispute raised by Mr.
Soparkar is for 80-I deduction on income from spare parts, the income from rewinding charges and interest on late payment from customers. In ITA No. 886/Ahd./96, 80-I deduction is for interest from bank and from others, misc. receipts and sales, insurance claim and labour charges.
He submitted that the three receipts are income derived from industrial undertaking, these having a direct and intimate connection with and part of industrial undertaking. He referred to the decision in the case of Mayank Electro Ltd. v. ITO [2001] 71 TTJ (Ahd.) 612 which has followed the Supreme Court decision in the case of CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 : [1994] 74 Taxman 331 wherein it was held that interest on late payment from customers charged pursuant to agreement of sale of goods was a part of trading receipt. He submitted that Bio Pharma's case (supra) does not deal with interest on late payment and, therefore, is not an authority on this issue. He then referred to two decisions of the Supreme Court in the case of Hindustan Lever Ltd. v. CIT [1999] 239 ITR 297 : [2000] 108 Taxman 181 and CITv.Sterling Foods [1999] 237 ITR 579 : 104 Taxman 204 (SC) which, he submitted, are the cases of incidental source. The industrial undertaking in one case and the export in the other was not the direct source. Licence was granted to the assessee because of the export and not because of manufacturing activity in the second case and that is why the sale was found to be of fourth degree. As regards interest received from bank for opening letter of credit or bank guarantee he submitted, is the profits derived from industrial undertaking. All receipts which have a direct and close connection with industrial undertaking are to be considered as income derived from industrial activity and not from manufacture alone. Any activity directly connected with industrial undertaking profit and gain arising therefrom is to be held to be derived from industrial undertaking.
13. Shri M.M. Patel, appearing for Sandek India Ltd. in ITA No. 1460/ Ahd./2002 adopted the arguments of Shri Soparkar. In his case, the issue is for 80HH and 80-I deduction on interest on late payment from customers and interest received from banks on deposits for opening letter of credit and bank guarantee.
14. Shri Ramesh Malpani appearing for Suncity Synthetics Ltd. (ITA No.4807/Ahd./96 and ITA No. 230/Ahd./96) stated that in his case 80-I deduction is for interest on late payment, interest on deposit for opening letter of credit and bank guarantee and interest received from banks and sarafi interest are involved. With regard to the first two items, he adopted the argument of Shri Soparkar. For the interest on sarafi account, he submitted that there must be made a distinction between initial funds and surplus funds which are ultimately reducing the cost of the assessee. It is only the subsequent funds which are not meant for industrial undertaking and the interest therefrom could at best be disallowed.
15. Shri P.K. Vyas is appearing for Pee Gee Fabrics P. Ltd. (ITA No.4850/ Ahd./1996). In his case, 80-I deduction is on the interest received on late payment is involved. He also referred to the decision of the Madras High Court in the case of CIT v. Madras Motor Ltd. [2002] 257 ITR 60 : 122 Taxman 516 wherein the interest on late payment on amounts receivable was held to be the profits and gains derived from the business of the assessee.
16. Shri Kishan Mehta is appearing for Kalpataru Power Transmission Ltd. (ITA No. 4079/Ahd./1995). In his case, the interest is received on fixed deposit taken for opening letter of credit and bank guarantee. He submitted that it is source within the industrial undertaking itself and not an independent one. He referred to the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, under Section 41(2) wherein receipts chargeable are held to be attributable to the industrial undertaking; a decision of the Bombay High Court in the case of CIT v. Paramoun t Premises (P.) Ltd. [1991] 190 ITR 259 and in the case of CIT v. Nagpur Engg. Co. Ltd. [2000] 245 ITR 806 against which SLP has been rejected by the Supreme Court as reported in 245 ITR 55 (St.), wherein interest has been held to be business income; the decision of the Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 : 102 Taxman 94 wherein it was held that interest earned during construction period reduces the cost of plant/machines; the decision of Pune Bench in the case of ZF Steering Gear (India) Ltd. v. Dy. CIT [2001] 70 TTJ 986 stating that "interest on deposit with bank as margin money is held to be income of the industrial undertaking". He further submitted that in the case of Bio Pharma (supra) interest on fixed deposit was on idle funds. In any case, he submitted, that the interest liability is having a direct nexus to day-to-day working and is an allowable deduction and, therefore, only the net interest is to be reduced. He then referred to the decision of the Supreme Court in the case of Hindustan Lever Ltd. (supra) and submitted that the deduction was denied because the profits were from sale in India and not from "export sales".
17. Shri J.P. Shah and Shri Manish Shah appearing for M/s. Tide Industries (ITA No. 5014/Ahd./1996) adopted the argument of Shri Soparkar and other counsel. In his case 80HH and 80-I is claimed on interest income including on margin money.
18. Shri R.C. Gupta, Commissioner of Income-tax, DR, appearing on behalf of the revenue, heavily relied upon the decision of the Tribunal in the case of Bio Pharma (sup ra) and in the case of Avani Petrochem (P.) Ltd. [IT Appeal No. 1215 (Ahd.) of 1995 dated 25-9-2001]. He also placed reliance on the cases of Privy Council in the case of CIT v.Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325; of the Supreme Court in the case of Sterling Foods (supra) and in the case of Hindustan Lever Ltd. (supra); Madras High Court in CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497; and in CIT v. South India Shipping Corporation Ltd. [1995] 216 ITR 651 : 116 Taxman 244. He also referred to the decision of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 110 : [1996] 87 Taxman 23 wherein interest was held to be an income from other sources. He then referred to decisions of Supreme Court in the case of Bakaro Steel Ltd. (supra) and Delhi Bench of the Tribunal in the case of Asstt. CIT v. Gallium Equipment (P.) Ltd. [2001] 73 TTJ (Delhi) (TM) 130 wherein the cases referred have been discussed. Unless and until the profit and gain is derived from the specified industrial undertaking from the manufacture and production of article or thing, the deduction, he submitted, would not be available to an assessee under Sections 80HH and 80-I of the Act.
19. We have heard the parties and considered the rival submissions. In all these appeals as the dispute is concerning the deduction under Sections 80HH and 80-I of the Act these two Sections are reproduced hereunder : Section "80-HH (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this Section applies, there shall, in accordance with and subject to the provisions of this Section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.
(2) This Section applies to any industrial undertaking which fulfils all the following conditions, namely :- (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 [but before the 1st day of April, 1990), in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area : Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that Section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area; (iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
Explanation.-Where any machinery, or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in. that area or in any other backward area and the totai value of the machinery or plant or part so transferred does rjot exceed twenty per cent of the total value of the machinery or plant used in the business, then for the purposes of Clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled.
(3) This Section applies to the business of any hotel, where all the following conditions are fulfilled, namely :- (i) the business of the hotel has started or starts functioning after the 31st day of December, 1970 [but before the 1st day of April, 1990], in any backward area; (ii) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence; (iii) the hotel is for the time being approved for the purposes of this sub-section by the Central Government.
(4) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning : (i) in the case of an industrial undertaking which has begun to manufacture or produce articles, and (ii) in the case of the business of a hotel which has started functioning, after the 31st day of December, 1970, but before the 1st day of April, 1973, this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974." Sub-sections (5) to (11) are not reproduced as they are not relevant to decide the controversy raised in these appeals.
Section "80-I (1) Where the gross total income of an assessec includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft], to which this Section applies, there shall, in accordance with and subject to the provisions of this Section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof: Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect [in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel] as if for the words "twenty per cent", the words "twenty-five per cent" had been substituted.
(1A) Notwithstanding anything contained in Sub-section (1), in relation to any profits and gains derived by an assessee from- (i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or (iii) the business of a hotel which starts functioning, on or after the 1st day of April, 1990, [but before the 1st day of April, 1991], there shall, in accordance with and subject to the provisions of this Section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty five per cent thereof : Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words "twenty-five per cent", the words "thirty per cent" had been substituted.
(2) This Section applies to any industrial undertaking which fulfils all the following conditions, namely :- (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of [ten] years next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power : Provided that the condition in Clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and with the period specified in that Section : Provided further that the condition in Clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted.
Explanation 1.-For the purposes of Clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2.-Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
Explanation 3.-For the purposes of this sub-section, "small-scale industrial undertaking" shall have the same meaning as in Clause (b) of the Explanation below Sub-section (8) of Section 80HHA. (3) This Section applies to any ship, where all the following conditions are fulfilled, namely:- (i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) it was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) it is brought into use by the Indian Company at any time within the period of [ten] years next following the 1st day of April, 1981.
(4) This Section applies to the business of any hotel, where all the following conditions are fulfilled, namely:- (i) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose; (ii) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees; (iii) the hotel is for the time being approved for the purposes of this sub-section by the Central Government; (iv) the business of the hotel starts functioning after the 31st day of March, 1981, but before the 1st day of April, 1991.
(4A) This Section applies to the business of repairs to ocean-going vessels or other powered craft which fulfils all the following conditions, namely:- (i) the business is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it is carried on by an Indian company and the work by way of repairs to ocean-giving vessels or other powered craft has been commenced by such company after the 31st day of March, 1983, but before the 1st day of April, 1988; and (iv) it is for the time being approved for the purposes of this sub-section by the Central Government.
(5) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning [or the company commences work by way of repairs to ocean-going vessels or other powered craft] (such assessment year being hereafter in this Section referred to as the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year: Provided that in the case of an assessee, being a co-operative society, the provisions of this sub-section shall have effect as if for the words "seven assessment years", the words "nine assessment years" had been substituted : Provided further that in the case of an assessee carrying on the business of repairs to ocean-going vessels or other powered craft, the provisions of this sub-section shall have effect as if for the words "seven assessment years", the words "four assessment years" had been substituted : (i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or (iii) the business of a hotel which starts functioning, on or after the 1st day of April, 1990 [but before the 1st day of April, 1991, provisions of this sub-section shall have effect as if for the words "seven assessment years", the words "nine assessment years" had been substituted: Prqvided also that in the case of an assessee, being a co-operative society, deriving profits and gains from an industrial undertaking or a ship or a hotel referred to in the third proviso, the provisions of that proviso shall have effect as if for the words "nine assessment years", the words "eleven assessment years" had been substituted.
(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel [or-the busjness of repairs to ocean-going vessels or other powered craft] to which the provisions of Sub-section (1) apply shall, for the purposes of determining the quantum of deduction under Sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the Initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
20. Sub-section (1) of Section 80HH provides for a deduction of 20 per cent of the profits and gains derived from an industrial undertaking or the business of a hotel, to which this Section applies. Sub-section (2) enumerates such industrial undertaking to which the Section applies.
Sub-section (3) on the other hand prescribes the business of a hotel to which the Section applies. Sub-section (1) of Section 80-I provides similar deduction in respect of profits and gains derived from an industrial undertaking or a ship or business of a hotel, etc., to which the Section applies. Sub-sections (2) to (4) and (4A) of these Sections prescribe various conditions which are to be fulfilled for claiming deduction. One of the conditions required to be fulfilled is that the industrial undertaking must manufacture or produce articles afer a particular specified date. The only difference between the two Sections 80HH and 80-I is that under Section 80-I, the manufacture or production of a article or a thing should not be one which is specified in the list in the 11th Schedule. The combined reading of both the Sub-sections clearly shows that deduction is available in respect of the profits and gains which are derived from an industrial undertaking which is engaged in the activity of manufacture or production. Both these Sections require that there must be an "industrial undertaking" and the profit must be "derived" therefrom. The deduction is provided as percentage of the profit which are derived from industrial undertaking and the dictions are for some specified-period starting from the initial year of manufacture of production. We, therefore, have to find out what is an "industrial undertaking" and what is "profit derived from.
21. The term "industrial undertaking" is not specifically defined in the Act though it appears in various other places including these two Sections, and various other enactments. Its general meaning is very wide. 'Industry' is ascribed a meaning in Chambers, 20th Century Dictionaries as: "The quality of being diligent; assiduity: steady application: habitual diligence: systemic economic activity: any branch of manufacture and trade:" The word "industrial" means "relating to or consisting in industry"; and "Undertaking" is stated to mean "that which is undertaken; any business or project engaged in; a task one sets oneself; the business of conducting funerals." In Websters it is "the act of one who undertakes or engage in a project or a business".
In a common parlance it may thus mean any and every 'enterprise' 'venture', 'engagement' whatsoever.
22. This term "industrial undertaking" came for consideration before various courts in various different contexts. These, as we find from the case law cited and referred to the issue, are discussed hereunder :P. Alikunju, M.A. Nazeer Cashew Industries v. CIT [1987] 166 ITR 804 : 34 Taxman 169 in connection with the provisions of Section 54D and Their Lordships observed as under: What then is an 'industrial undertaking'. The Income-tax Act does not define what is 'an industrial undertaking' or what is an 'industrial undertaking'. It has, therefore, become necessary to construe these words. Words used in a statute dealing with matters relating to the general public are presumed to have been used in their popular rather than their narrow, legal or technical sense.
Loquitur ut vulgus, that is, according to the common understanding and acceptation of the terms, is the doctrine that should be applied in construing the words used in statutes dealing with matters relating to the public in general. In short, if an 'Act is directed to dealings with matters affecting everybody generally, the words used have the meaning attached to them in the common and ordinary use of language' [Vide Unwin v. Hanson (189) 2 Q.B. 115 (CA), per Lord Esher M.R., at page 119]. That the Income-tax Act is of general application, is beyond dispute. It, therefore, follows that the meaning that should be given to these words 'industrial undertaking' must be the natural meaning. It is all the more so because the Income-tax Act is one consolidating and amending the law relating to income-tax and supertax. (See Rao Bahadur Ravula Subha Rao v. CIT [1956] 30 ITR 163 (SC) at p. 169).
...Undertaking' in common parlance means an 'enterprise', 'venture', 'engagement'. It can as well mean 'the act of one who undertakes or engages in a project or business' (Webster). An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business. 'Undertaking', for the purpose of this Section, however, must be an 'industrial undertaking'. The demonstrative adjective 'industrial undertaking' qualifying the word 'undertaking' unmistakably and with precision shows that the undertaking must be one which partakes of the character of a business.
(b) The term, in the case of CIT v. Bhageeratha Engg. Ltd. [1992] 193 ITR 674 : 61 Taxman 248 (Ker.), again came up for consideration in connection with investment allowance under Section 32A of the Act. The court noticing that the words occur in other provisions of Sections 54D, 80HH, 80HHA, 80-I, 80J, etc. held that in the absence of a definition in the Act, the words "industrial undertaking" should be construed in its popular sense. In this case, the assessee was engaged in construction of dams. Referring to the decision of Bangalore Water Supply & Sewerage Board v. A. Rajappa AIR 1978 SC 548, wherein the word 'Industry' and "undertaking" have been construed in a very wide and liberal sense but restrictive characteristics is shown by the society of words before and after.
It held that the words "industrial undertaking" occurring in Section 32A(2)(6)(i) of the Income-tax Act, should be construed in a liberal, wide and practical sense. Their Lordships observed that the statutory language is clear and should not import any limitation therein and that it cannot be stated that in all cases manufacturing or production is a condition precedent to call an activity, business, or trade an industrial undertaking. It was further held that the industrial undertaking may be any one of the categories, "business of construction", "business of manufacture", "business of production", of any article or thing not specified in the Eleventh Schedule. It was held that the assessee is carrying on business of construction - an integrated and complicated business - in a systematic manner and while engaged in business of construction, it is manufacturing and processing various materials to be used in the construction. It is using the plant or machinery in such feeding or ancillary activities to carry on the business more efficiently and economically. The feeding activity so carried on for "manufacturing or processing of goods" facilitates efficient and economic management and the effectuation of the purpose of construction.
Their Lordships therefore, held that the assessee used new machinery or plant in an industrial undertaking for the purpose of construction or production of an article or thing and such article or thing is not specified in the Eleventh Schedule and so, the assessee is entitled to relief under Section 32A. (c) The Supreme Court decision referred to above was concerned with the term "Industry" and the "Undertaking" as appearing in Industrial Disputes Act and in that context it held as under: 34. So, the long and short of it is, what is an industry? Section 2(;) defines it: industry" means any business, trade undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen.
Let us put it plain. The canons of construction are trite that we must read the statute as a whole to get a hang of it and a holistic perspective of it. We must have regard to the historical background, objects and reasons, international thoughtways, popular understanding, contextual connotation and suggestive subject-matter.
Equally important dictionaries, while not absolutely binding are aids to ascertain meaning. Nor are we writing on a tabula rasa.
Since Banerjee, 1953 SCR 302: (AIR 1953 SC 58), decided a silver span of years ago, we have a heavy harvest of rulings on what is an 'industry' and we have to be guided by the variorum of criteria stated therein, as far as possible and not spring a creative surprise on the industrial community by a stroke of freak originality.
35. Another sobering sign. In a world of relativity where law and life interlace, a search for absolutes is a self-condemned exercise.
Legal concepts, ergo, are relativist, and to miss this rule of change and developmental stage is to interpret oneself into error.
36. Yet a third signpost. The functional focus of this industrial legislation and the social perspective of Part IV of the Paramount Law drive us to hold that the dual goals of the Act are contentment of workers and peace in the industry and judicial interpretation should be geared to their fulfilment, not their frustration. A worker-oriented statute must receive construction where, conceptually, the keynote thought must be the worker and the community, as the Constitution has shown concern for them, inter alia, in Articles. 38, 39 and 43.
37. A look at the definition, dictionary in hand, decisions in head and Constitution at heart, leads to some sure characteristics of an 'industry', narrowing down the twilt zone of turbid controversy. An industry is a continuity, is an organized activity, is a purposeful pursuit - not any isolated adventure, desultory excursion or casual fleeting engagement motivelessly undertaken. Such is the common feature of a trade, business, calling, manufacture - mechanical or handicraft-based service, employment, industrial occupation or avocation. For those who know English and are not given to the luxury of splitting semantic hairs, this conclusion argues itself.
The expression 'undertaking' cannot be torn off the words whose company it keeps. If birds of a flock together and noscitur a sociis is a commonsense guide to construction, 'undertaking' must be read down to conform to the restrictive characteristic shared by the society of words before and after. Nobody will torture 'undertaking' in Section 2(;) to mean meditation or musheria which are spiritual and aesthetic undertakings. Wide meanings must fall in line and discordance must be excluded from a sound system. From Banerjee (AIR 1953 SC 58) to Safdar Jung (AIR 1970 SC 1407) and beyond, this limited criterion has passed muster and we see no reason, after all the marathon of argument, to shift from this position.
38. Likewise, an 'industry' cannot exist without co-operative endeavour between employer and employee. No employer, no industry; - no as a dogmatic proposition in economics but as an articulate major premises of the definition and the scheme of the Act, and as a necessary postulate of industrial disputes and statutory resolution thereof.
39. An industry is not a utility but geared to utilities in which the community has concern. And in this mundane world where law lives now, economic utilities - material goods and services, not transcendental flights nor intangible achievements - are the functional focus of industry. Therefore, no temporal utilities, no statutory industry, is axiomatic. If society, in its advance, experiences subtler realities and assigns values to them, jurisprudence may reach out to such collective good. Today, not tomorrow, is the first charge of pragmatic law of western heritage.
So we are confined to material, not ethereal end products." (d) The Karnataka High Court in the case of Shankar Construction Co.
v. CIT [1991] 189 ITR 463 : 56 Taxman 98, held that the activities of a firm carrying on business in manufacturing and sale of tiles and specialising in construction of dams and canals to be those of an industrial undertaking. It was a claim of investment allowance which could be claimed by an industrial undertaking. In this regard the term "industrial undertaking" was explained to be as under: The expression "industrial undertaking" has not been defined in the Income-tax Act, "Industry" is a term of wide import. Where there is (i) systematic activity; (ii) organised by co-operation between employer and employee; (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes, prima facie there is an industry. "Undertaking" is an actual effect an activity of man which, in commercial or business parlance, means an activity engaged in with a view to earn profit.
(e) In the case of CIT v. N.C. Budharaja & Co. [1980] 121 ITR 212, the Orissa High Court also dealt with the term as under: Industrial undertaking' has no statutory definition. The law is fairly settled that where there is an absence of the statutory definition, it would be open to look for the meaning by referring to the definitions in sister legislations and failing that, to adopt the common parlance meaning. There can be no dispute that the business of a contractor who has undertaken the construction of an irrigation project would be an industrial undertaking for the purpose of the Industrial Disputes Act. The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles. Even in the absence of either of them, in the strict sense, there could be an industrial undertaking. The Tribunal in the instant case has clearly recorded a finding of fact that the assessee had undertaken manufacture of certain materials which it ultimately utilised in the construction of the dam and it worked for the ultimate production of a dam.
23. Though this decision has been reversed by the Supreme Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412 : 70 Taxman 312, on eligibility of investment allowance on machinery used for construction of dams, canals, etc., Their Lordships did not express any opinion as to the meaning of the term "industrial undertaking" given by the High Court, because no arguments have been addressed by the learned counsel of the Revenue questioning the view taken by the High Court. On a reading of the provisions and considering the use of the machineries as the determinative factor, Their Lordships held that Sub-clause (iii) of Clause (b) of Sub-section (2) of Section 32A does not comprehend within its ambit construction of a dam, a bridge, a building, p. road, a canal or other similar construction and therefore, the machinery used for such an activity was held to be not entitled to deduction thereunder, it being not used for construction, manufacture or production of any one or more articles and things.
24. These are the cases wherein the deduction was with reference to plant and machinery used for construction, manufacture or production of an article or thing which was found to be a condition precedent for investment allowance irrespective of the fact that the term "industrial undertaking" has a wider meaning or the restrictive one. This much, however, is clear that it has to be an "industrial undertaking" which is engaged in construction, manufacture or production of an article or thing not specified in the Eleventh Schedule. Even where the widest meaning is given to the term 'Industry' in the Industrial Disputes Act, 1956 the Supreme Court gave a restrictive characteristic to the term by noticing the associated words by stating 'society of words before and after'. On a fair reading of the provisions of sub-sections 80HH and 80-I, we find the similar restrictive scope of the wider concept, of industrial undertaking by the words contained in these Sections itself.
Sub-section (1) to both these Sections restrict the deduction to an industrial undertaking to which the Section apply. Sub-section (2) enumerates such industrial undertaking to which the Section apply and that is an industrial undertaking which has begun to manufacture or produce articles after a specified date stated in Section 80HH and articles or things within a specified period of 10 years stated in Section 80-I, and that too, of article or thing not specified in Eleventh Schedule. Whatever may be the meaning given to the term "industrial undertaking" elsewhere, in so far as the provisions of Sections 80HH and 80-I arc concerned, it has to be an industrial undertaking which has begun manufacture or produce article (80HH and 80HHA) or articles or things not specified in the Eleventh Schedule (80-I). A person may be engaged in many activities and each and every activity by itself could be an industrial undertaking but the deduction under Section 80HH, and 80-I is provided to certain specified industrial undertaking engaged in manufacture or production of articles in one case and articles or things not specified in Eleventh Schedule for 80-I in another. If the industrial undertaking is engaged in an activity other than the manufacture or production of an article or thing it would not be entitled to the deduction. As a corollary and if it is partly so engaged in manufacture or production, only that part of the industrial undertaking would be entitled to deduction and only of such profits and gains as are from manufacture or production.
25. We may mark the difference of the wording in these Sections itself whereas in case of an industrial undertaking it is the profit and gains derived from industrial undertaking, in case of hotels it is the business from which the profits and gains are to be derived from. Sale is not the only source of income but also one mode of finding out of the profit. The other mode is the market value of the articles or things produced, i.e., in case of captive consumption and see in this connection the decision of the Supreme Court in the case of Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax [l962] 44I TR 6 (SC) wherein it was observed that even if agricultural produce is self-consumed, its value is liable to be treated as agricultural income, since extent of sale is not compulsory (captive consumption).
26. The second requirement to be seen for availing the benefit of deduction under Sections 80HH and 80-I is that profits and gains must be derived from industrial undertaking. The industrial undertakings manufacture and production must be the direct, effective and of First degree source of the profit and gains. The deduction under these Sections 80HH and 80-I is available only in respect of such profits and gains which have a direct or proximate nexus with the activity of manufacture or production. Any other profit or gains, which is not derived from an industrial undertaking, though attributable to the business of the industrial undertaking, would not be entitled to deduction. The profits and gains must accrue to the asscssee in the course of or arising from the manufacture or production of the industrial undertaking.
27. The earliest decision of the Privy Council on the term "derived from" we find, is in, the case of Raja Bahadur Kamakhay a Naray an Singh(suprd). The question before Their Lordships was whether the interest received by the assessee on late payment of rent which was admittedly derived from agricultural land was the income derived from agriculture. In this connection, Their Lordships observed the diversity of the judicial opinion on this issue - the Calcutta High Court and Madras High Court have answered this question in the negative and Allahabad and Patna High Courts answering it in the affirmative. Their Lordships noted that the conflic ting points of view were put with clarity in the judgment of Braund, J. of Allahabad High Court as under: The argument on the one hand is that interest payable (whether by statute or not) on arrears of rent which have already become a debt due is not referable in any way to the agricultural relationship of landlord and tenant, but is attributable solely to their character as creditor and debtor. It is said that interest is in its nature merely that commercial compensation which either the accepted practice of business or in some case the Legislature has adopted to see that a creditor does not suffer from the default of his debtor.
That, it is said, has nothing whatever to do with the relationship of landlord and tenant and, therefore, is not in any way derived from the agricultural land which is the subject-matter of the tenancy. That is one way of putting it. The other way of putting it is that interest on arrears of rent is something which in this case has been introduced by the United Provinces Tenancy Act as a condition of the relationship between landlord and tenant. Arguing from that, it is said that, whether or not such interest can be strictly classified as rent, it certainly can be classified as coming with the larger expression 'revenue' which forms part of the definition of agricultural income. It will be remembered that the definition speaks of 'any rent or revenue derived from land'. Those who put it in this way say that such interest, when received, has its origin in the tenancy, because, if there had been no tenancy, there would have been no arrears of rent, and if there had been no arrears of rent, there would have been no statutory interest.
Following this sequence of causes, they say that it is obvious that interest in circumstances such as these must be classified as revenue derived from land.
The interest clearly is not rent. Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrears is not such a payment. It is not part of the rent, nor is it an assertion to it, though it is received in respect of it.
Equally clearly the interest on rent is revenue, but in Their Lordships' opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent - and rent is obviously derived from land - there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All that emerges is that as regards the interest, land rent and non-payment of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained.
The word "derived" is not a term of art. Its use in the definition indeed demands an inquiry into the geneology of the product. But the enquiry should stop as soon as the effective source is discovered.
In the geneological tree of the interest land indeed appears in the second degree, but the. immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.
There is no commercial connection between the interest and the rented land and effective source - not land - has become apparent." 29. These considerations Their Lordships held supply a negative answer to the question posed. Their Lordships rejected assessee's contention that for a considerable period income-tax authorities have not treated interest on rent in arrears as taxable, and that in their manual published from time to time this view was openly stated which in their view such interest fell within the definition of agricultural income.
Their Lordships found themselves unable to accept this contention for the reason that they are unable to draw from the facts brought to their attention the inference that the Legislature had by the repetition of the debated phrase adopted the meaning attributed to it by the taxing authorities and that Their Lordships were not prepared to make the assumption that a practice purporting to give effect to a definition has resulted in the creation of such a generally received meaning embodying that practice as would justify the inference that the attributed meaning has been silently adopted by the Legislature.State of Kerala v. Karimtharuvi Tea Estate Ltd. [1966] 60 ITR 275 (SC), the question came up for consideration before the Supreme Court with regard to sale proceeds from sale of trees grown to provide shade for the tea plant and the Supreme Court, even though planting of the tree had a close connection for growing tea, observed as under: There is no controversy about the fact that the owners of tea estates plant grevelia trees not for the purpose of deriving any income therefrom but solely for the purpose of providing shade for the tea plants and that such shade is essential for the proper cultivation of tea. The trees were cut down and sold after they had become useless by efflux of time. The grevelia trees in the tea estate of the respondent constituted therefore capital assets and the proceeds derived therefrom by sale as firewood would not constitute agricultural income under the Act.
31. In the case of Mrs. Bacha F. Guzdar v. CIT [1952] 22 ITR 158 (Bom.) it was observed that although you may hold back the source of the income, you should not go right back to its ultimate source. The moment you came to an immediate and effective source, one ought not to go any further. This case affirmed in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC) and it was been held as under: No doubt, initial source which had produced revenue was land used for agricultural purposes, but in fact dividend is derived from investment made in shares and the foundation is contractual relationship of the company and the chairman.
32. In the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) it was observed that the mere fact that an activity has some connection with or is in some way dependent on land is not sufficient to bring it within the scope of the term and such extent of the term "agriculture" is unwarranted.
33. In the case of Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951 : 3 Taxman 390 (Bom.) (affirmed by Supreme Court) it was observed that the Privy Council in Raja Bahadur Kamakhaya Narayan Singh's case (supra) restricted the effect and the meaning to be ascribed to the term "derived from", the enquiry was required to be stopped as soon as the effective source is discovered.
34. In the case of Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT [1982] 137 ITR 616 the Gujarat High Court observed that the words "derived from exports" cannot be interpreted as meaning "referable to exports". Profits and gains can be said to have been "derived" from an activity carried on by a person only if the activity is the immediate or effective source of the profits or gains. There must be a direct nexus between the activity and the earning of "profits or gains." Applying these tests the court held that (i) Savings effected on account of import of raw materials at a price lower than the ruling home-market price under import entitlements and import licenses which are not transferable cannot be regarded as profits derived from exports and the rebate under Section 2(5) cannot be claimed in respect of it, (ii) Prima facie, income derived from sale of transferable import entitlements and import licenses cannot be said to have a direct nexus with the export of goods. The Court also held that a cash sapsidy or allowance given on export of goods is directly connected with the export of goods and rebate under Section 2(5) can be claimed in respect of it. Source of export incentive, however, is held by the Supreme Court in Sterling Foods' case (supra), the scheme of the Government of India.
35. In the case of Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT [1983] 143 ITR 590 : 14 Taxman 343 (MP) it was observed as under : In the geneological tree of income from import entitlements import comes first and export appears in the second degree. The income arising from import entitlements is directly related to the import activities or the import business of the assessee. Though it was only because of the export business that the assessee got the import license, yet the connection of the income resulting from import entitlements to the export business is indirect and the direct source of the income is the import business. Therefore, the profits arising from import entitlements could not be included in the value of the turnover of exports under Section 2(3).
36. The term 'derived from' came up for considei ation before the Supreme Court in the case of Sterling Foods'(supra) v.i connection with the receipt from sale of import entitlement and it was held by Their Lordships of Supreme Court "The use of the words 'derived from' in item 11-AA(2) suggests that the original source of the product has to be found. Thus, 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 Greek word 'demos' the people, and most dictionaries will so state.
That is the ordinary meaning of the 'derived from' and there is no reason to depart from that ordinary meaning here." Again it said "There must be, for the application of the words 'derived from' a direct nexus between the profits and gains and the industrial undertaking." It was ultimately held that the source of import entitlement is the export promotion scheme of the Central Government and, therefore, there is "no direct nexus involving the profits and gains of industrial undertaking.
To claim benefit under Section 80HH, Their Lordships observed, "the assessee has to establish that the profits and gains were derived from industrial undertaking and it was just not sufficient that the commercial connection was established between the profits and the industrial undertaking. The industrial undertaking had to be the source of the profit. The business of the industrial undertaking had directly to yield the profit. The industrial undertaking should be the direct the source of that profit and not a means to earn the profit." (underlining by us) 37. We may mark here the difference in approach. The Privy Council while refuting assessee's claim, though observed that "There is no commercial connection between the interest and the rented land" giving an impression that, had commercial connection was there, the interest could have been the income derived from land, but the aforesaid decision of Supreme Court in Sterling Foods' case (supra) made is clear that mere commercial connection between the profit and the industrial undertaking is just not sufficient. The industrial undertaking should be the direct source of that profit and not a means to earn that.
38. The term came up again for consideration before Their Lordships of the Supreme Court in the case of Hindustan Lever Ltd. (supra) in connection with "profits and gains derived from export of any goods" and Their Lordships held that profits on sale of goods in India wherein the import entitlements were used by the assessee to purchase the goods for use in manufacture of those products were not the profits and gains derived from export. It was observed that the immediate source of the profit was the sale of goods in India and the export of other goods was not even the second degree but it had to be traced to even the more remote degree. In the chain of sequence, the earlier export would be four degrees away.
39. The Madras High Court in the case of Pandian Chemicals Ltd. (supra) considered this term with regard to the interest on the deposits with the Electricity Board for the power supply to be used for running the industries, which would not have been made available to the assessee without the deposit in favour of the Electricity Board was held to be not the income derived from industrial undertaking. Their Lordships observed that the immediate source of interest was the deposit itself and the effective source in geneology of the source of interest income is the deposit and not the business as the industrial undertaking is removed by one step from the source of income for the interest. Their Lordships further observed that the deposit might be an incidental investment with the business of the industrial undertaking but that would not: be sufficient to render the interest income as profits and gains derived from industrial undertaking. The fact that an amount was assessable as business income itself was observed to be not sufficient to hold that interest income was derived from the actual conduct of the business of the industrial undertaking.
40. In the case of Gallium Equipment (P.) Ltd. (supra), the interest on the fixed deposit taken for the security of the customers was held to be income derived from industrial undertaking since the fixed deposits were pledged with the bank by way of security against the advance payments made by customers for purchase of goods from the assessee.
This decision discussed the Supreme Court decision in the case of Sterling Foods (supra). The case of Pandian Chemicals Ltd. (supra) was sought to be distinguished on the ground that there was no discussion as to the fact whether the assessee had made any payment of interest on borrowed funds. That cause may be, as observed in Bio Pharma's case (supra) relevant ground for netting of the interest income by the payment of interest on borrowed funds but not a relevant consideration for holding the interest income as 'derived from industrial undertaking'. The decisions of Vellore Electric Corporation Ltd. v. CIT [1997] 227 ITR 557 : 93 Taxman 401 (SC) and Ashok Ley land Ltd. v. CIT [1997] 224 ITR 122 : 90 Taxman 223 (SC) relied upon by the Tribunal were concerning the interpretation of the term "attributable to" which term, as even stated by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), is a wider concept than the concept "derived from". There are two decisions of the Madras High Court in the case of South India Shipping Corporation Ltd. (supra). One is reported in South India Shipping Corpn. Ltd. 's case (supra) and the other is reported in P.N. Verma v. CIT [1997] 227 ITR 24 (Raj.). The earlier decision relied upon by the Tribunal has been over-ruled in the latter decision and this fact was not brought to the notice of the Tribunal.
41. The term "derived from" in comparison to the term "attributable to" in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) was considered by the Supreme Court and Their Lordships observed that "it cannot be disputed that the expression 'attributable to' is certainly wider in import than 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 generating and distribution of electricity, . It is also stated in this case that "whenever the Legislature wanted to give a restricted meaning, it used the expression "derived from" as, for instance, in Section 80J." Similar were the observations by the Supreme Court in the case of Vellore Electric Corpn. Ltd. (supra) wherein the interest from the investment in securities was held to be the profits attributable to business of electric company.
42. In the case of Ashok Ley land Ltd. (supra), the question was with regard to the profits and gains arising from import and sale of spare parts for the purposes of the erstwhile Section 80-I wherein the deduction was allowable if the income is "attributable to" the industrial undertaking. In this case, the Tribunal found that the assessee commenced manufacturing Ashok Leyland trucks in collaboration with foreign company Leyland and there was a phased programme for the manufacture of necessary spare parts. It was found that some of the purchasers of the Leyland trucks from the assessee found it difficult during some years to get the requisite spare parts because the spare parts manufactured by the assessee were not sufficient to meet the demand or because the assessee did not manufacture those particular spare parts. In the circumstances and as a matter of commercial expediency, the assessee imported such spare parts and sold them during the accounting year relevant to the year concerned herein. Based on these findings, the Supreme Court held that profits and gains arising from import and sale of spare parts was attributable to industrial undertaking carried on by the assessee and that on the facts found by the Tribunal it was difficult to dissociate the said activity to the main activity carried on by the assessee namely manufacture and sale of Ashok Leyland trucks. It was intimately connected with the priority industry set up and being run by the assessee and that the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co.
Ltd. (supra) clearly support the view.
43. The decision of the Tribunal in the case of Inductotherm (India) Ltd. (supra) dealt with the interest income on inter-corporate deposit as well as interest income earned by the assessee on deposit with Electricity Board for power connection. After considering the Supreme Court decision in Sterling Foods 'case (supra) the Tribunal held that such interest would not qualify for deduction under Section 80-I. In this case, the interest on deposit with bank utilised by way of security against credit facilities was however, held would qualify for deduction under Section 80-I.44. In a recent case of Madras Motor Ltd. (supra), the Madras High Court held that interest on delayed payments for goods exported is held to be entitled to deduction under Section 80HH. The court observed that "if the purchase of the forgings did not make the payment for forgings and then agreed to pay interest on the delayed payment, the said interest would be directly relatable to the business of the assessees of forgings. Thus, the interest would have to be included as the profits and gains derived from business of the assessee and would be entitled to be covered by Section 80HH. The following are the observations of the court: Let us now consider the interest earned by the assessee on the belated payments. There can be no doubt that this interest would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments for the forgings and then agree to pay the interest on the delayed payments, the said interest would have direct nexus with the business of forgings. The true test would be whether such interest would be available to the assessee otherwise also. The answer to the question would be certainly in the negative. The interest being directly relatable only to the amounts receivable by the assessee during the course of its business on account of the sale of forgings, this interest would have to be included as the profits and gains derived from the business of the assessee. We hold that this part of the interest would be entitled to be covered by Section 80HH of the Act.
45. This case thus held that interest on delayed payment would be income derived from assessee's business of forgings and, therefore, entitled to deduction under Section 80HH. It has not discussed the decision of Privy Council in the case of Raja Bahadur Kamakhaya Narayan Singh (supra). In this very case, however, the interest on margin money for obtaining the letter of credit was held to be not entitled to deduction under Section 80HH and the court observed "that the interest which was earned by the assessee from bank deposits made for obtaining the letter of credit for the purpose of export would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental thereto and such interest had to be ignored from the allowable profit under Section 80 HH.46. We would discuss now certain other cases referred to in the course of hearing. One is in the case of CIT v. Gujarat Mineral Development Corporation [1981] 132 ITR 377 : [1980] 4 Taxman 526 wherein the Gujarat High Court held that the amount kept by the assessee in short-term fixed deposits out of idle funds are to be included in computation of capital employed for the purpose of relief under Sections 84 and 80J for the relevant year. There was no question for consideration before the court as to whether the interest income on fixed deposit represented profits and gains derived from industrial undertaking: (i) In the case of Paramount Premises (P.) Ltd. (supra), the assessee was required to give guarantee to the State Bank of India in respect of the land taken on lease for construction work and for that purpose certain amounts were kept on fixed deposits on which the assessee earned interest. The Bombay High Court held that the entire interest sprang from the business activity of the assessee and did not arrive of any independent activity and, therefore, the Tribunal was justified in holding that interest was assessable as income from business. It was thus a case for determination as to whether it was business income or not.
(ii) In the case of Nagpur Engg. Co. Ltd. (supra), the Nagpur Bench of the Bombay High Court held that the Tribunal was justified in directing the Assessing Officer to treat the interest income from fixed deposit as eligible profits of the business while computing deduction under Sections 80HHC and 80-I of the Income-tax Act. In this case, the decision of Paramount Premises (P.) Ltd. (supra) was followed. This case apparently proceeded on the premises that the business income by itself would be the income eligible for deduction under Sections 80HHC and 80-I. (iii) In the case of Bokaro Steel Ltd. (supra) certain advances were made by the assessee to the contractors to facilitate the construction activity of putting together a very large project which was as much to ensure the work of the contractors proceed without any financial hitch as to help the contractors. Their Lordships of the Supreme Court held that the arrangement which were made between the assessee company and the contractors pertaining to inter alia this receipt were arrangements which were intrinsically connected with the construction of its plant and therefore, they were capital receipts and not the income of the assessee from any independent source. It is a case establishing a connection between the receipt of interest and the capital outlay.
(iv) Similarly, in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. [2001] 118 Taxman 489, the Supreme Court held that the deposit of money which is directly linked with the purchase of plant and machinery and not in a case where any surplus share capital money which was lying idle has been deposited were held to be income and, therefore, any income earned on such deposits was incidental to the acquisition of asset for setting up the plant and machinery.
47. In Avani Petrochem (P.) Ltd.'s case (supra) interest has been mainly received from one of the group concerns on the amount which has been advanced directly from the overdraft account to ensure that the limit sanctioned by the bank was not reduced. The Tribunal held "On the facts of the present case, the interest income, though assessed as income from business, can not be regarded as income derived from the assessee's industrial undertaking".
48. In the case of Amarsinhji Stationery Industries Ltd. (supra) the Tribunal upon consideration of the Supreme Court decision in Sterling Foods' case (supra) held that interest income from IDBI deposit, on NSC deposits with Govt. Deptt, fixed deposits against margin money for guarantee /L.C., on intercorporate loans, on IT Refunds and on Hundies as also on insurance claims receipts would not be eligible to deduction under Section 80-I of the Act.
49. In the case of Kalpataru Power Transmission Ltd. (supra) one of the assessees before us, the Tribunal, in the appeal for assessment year 1991-92 in ITA No. 2700/Ahd./1995 order dated 4-7-2001 following the two decisions of the Supreme Court in Sterling Food's case (supra) and Hindustan Lever Ltd. 's case (supra) wherein the direct nexus between the profits and gains and the industrial undertaking was considered necessary for the application of the words 'derived from', held that there was no such direct nexus in so far as interest received by the assessee from bank deposits was concerned.
50. In Nirma (P.) Ltd. [ITA Nos. 4576 and 4567/Ahd./1992] for assessment year 1989-90, the Tribunal following Pandian Chemicals Ltd.'s case (supra) held that the deduction under Sections 80-I and 80HH on interest on excess deposit and interest on IDBI deposit were not allowable. It, however, held that as regards profit on sale of raw material, the deduction was allowable by virtue of the decision in the case of Norma Detergent for assessment year 1988-89 (copy not made available nor reasons discussed). Further, following the aforesaid order of Norma Detergent, the deduction under Sections 80HH and 80-I with regard to Kasar Vatav and profit on sale of bardana and waste material was held allowable. Again, following the decision of the Tribunal in the case of Nirma Chemicals for assessment year 1989-90 (copy not available) the interest on late payment of trade debts was held to be eligible to deduction under Sections 80HH and 80-I. Against this decision, the Revenue went in appeal under Section 260A and Their Lordships of Gujarat High Court held that no substantial question of law arose. This is what is stated in another order of the High Court in the case of ITO v. Mayank Electro Ltd. [IT Appeal Nos. 231 and 232 of 2001] wherein also a similar question was raised and the High Court noting the statement of the Central Government Standing Counsel and the learned counsel for the respondent that the controversy sought to be raised therein had already been concluded by the decision of the court dated 18-10-2000 in Tax Appeal No. 269 of 2000 [which is a case of Nirma (P.) Ltd. (supra) of the aforesaid assessee], Their Lordships held that these appeals did not raise any substantial question of law.
51. In the case of Mayank Electro Ltd. (supra) against which an appeal has been rejected by the High Court as no substantial question of law arose the interest on delayed payment of sale price was held to be a part of the sale proceeds because the charging of interest on delayed payment was found to be the term of the agreement for sale of the article manufactured by the industrial undertaking. In this case, the decision in the case of Raja Bahadur Kamakhaya Narayan Singh (supra) was distinguished by the Tribunal by stating that interest was payable on arrears of rent by virtue of statutory provisions and, therefore, could not be treated as rent derived from agricultural activity. The Tribunal relied upon the decision of the Supreme Court in the case of Govinda Choudhury & Sons (supra) wherein the interest receipt was claimed by the assessee to be treated as part of trading for application of flat rate whereas the Revenue assessed the entire sum as income from other sources. The Supreme Court in that case observed that if the amounts are not paid at proper time and interest is awarded on such delay, such interest is only an accretion to the assessee's receipt from contracts. It is obviously attributable and incidental to the business carried on by the assessee and that it would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. To quote, "We find it difficult to comprehend how the interest received by the assessee can be treated as receipt which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partake of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain dispute between the parties. It cannot be separate from the other amount granted to the assessee under the award and treated as income from other sources.
Reference in this case was also made to decision of Bombay High Court in the case of CIT v. Buckau Wolf New India Engg. Works Ltd. [1984] 150 ITR 180 : [1983] 15 Taxman 267 and CIT v. Buckau Wolf New India Engg.
Works Ltd. [1991] 187 ITR 464 wherein it was held that the income derived from the interest paid by the buyers of the machinery manufactured by the assessee on deferred payment also has direct nexus to the assessee's priority industry and is attributable to it.Dy. CIT v. Jagdish Electronics (P.) Ltd. [1998] 66 ITD 542 the Pune Bench of the Tribunal held that interest earned by the assessee on deposit made by it with the banks and other parties out of the surplus or idle funds could not be equated with or treated as profits and gains derived from industrial undertaking. In this case, however, it was held that interest on fixed deposit made by the assessee with the bank for obtaining letter of credit, there was a direct nexus between the earning of interest on the fixed deposit with the banks 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.
The Pune Bench has also noted the decision of Jabalpur Bench of the ITAT in the case of Dy. CIT v. Vindhya Telelinks Ltd. [1997] 58 TTJ (Jab.) 450 wherein it was held that interest income earned on short-term deposit with banks or with IDBI cannot be said to be arising out of running of industrial undertaking so as to be included in computing the profits and gains of industrial undertaking under Sections 80HH and 80HHA. Similar were the observations noted in the case of Ponds Exports Ltd. v. ITO[1996] 58 ITD 417 a case decided by the Madras Bench of the Tribunal with regard to deduction under Section 80-IA which also is available on the income derived from an industrial undertaking and it was held that interest on bank deposit could not be considered as profits and gains derived from industrial undertaking.
The decision of the Madras High Court in the case of CIT v. Universal Radiators (P.) Ltd. [1981] 128 ITR 531 : [1980] 3 Taxman 485 was referred to wherein the bank deposits were made out of surplus funds which were clearly not required by the assessee and it was only after the deposits were made that when the assessee required moneys, it approached the bank for loan and at that stage the fixed deposit receipts were given as security for loan. In these circumstances, it was held that there was no connection between priority industry and the fixed deposit. In the decision in the case of Vellore Electric Corpn.
Ltd. (supra) which was a case under Section 80-I of the time when it used the expression "attributable to", the Bench observed "though in that case the court was concerned with the expression 'attributable to yet it is an authority for the proposition that where the investments had been made in the course of actual carrying of the business and the income accrues on such investment, then it can be said that there is a direct and proximate connection between the income earned and activity of the business.
53. In the case of Kinetic Honda Motor Ltd. v. Joint CIT [2001] 72 TTJ (Pune) 72, the interest earned on old payments of debtors to the assessee is considered to be part of sale price of items manufactured by the assessee and, therefore, it was held that it should be considered as part of the profits of industrial undertaking. In this case, it was also held that income from sale of spare parts are not entitled to Section 80HH deduction as there was no manufacturing activity in respect of the spare parts; it was pure and simple trading activity.Dy. CIT v. Transpower (P.) Ltd. [2001] 72 TTJ 867 the Guwahati Bench of the Tribunal held that the assessee having made fixed deposits with the banks for procuring bank guarantee and obtaining overdraft facilities thereagainst, the interest on deposit was earned in the course of carrying on the business of industrial undertaking and was eligible for deduction under Sections 80HH and 80-I. It was observed in this case that the assessee was compelled to make fixed deposits to obtain the bank guarantee and overdraft facility against the same without which it could not have run the show smoothly i.e., the industrial undertaking.
55. Following major issues as have been argued by the various counsels are considered and adjudicated upon as under: (vii) Interest recovered from debtors for late payment of the sale price : Interest, in general terms, is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. - Halsbury's Laws. It is payment for commercial compensation for non-payment of the debt on time. When a sale is effected the money consideration thereof becomes due and payable and interest starts running as per the terms stipulated. Such interest is not a consideration of sale of goods of the industrial undertaking, even though it has its origin in sale. Had sale of goods manufactured been not made, there would not be debt and consequently no interest, but the immediate source is the debt owed which takes it away a degree away from industrial undertaking. In the light of the Privy Council in the case of Raja Bahadur Kamakhaya Narayan Singh (supra) the immediate and effective source would be the debt itself. In Govind Choudhury & Sons' case (supra) the interest paid is held to be an accretion to assessee's receipts and attributable to and incidental to the business carried by him and not de hors the business carried on by the assessee. It was therefore held to be not income from other sources. This is not the case near to the case of Cambay Electric Supply Industrial Co. Ltd. (supra). The question whether interest was derived from the execution of contracts was not there before the Supreme Court in this case. See also in this connection two decisions of the Supreme Court relating to levy of excise duty in the case of Government of India v. Madras Rubber Factory AIR 1995 SCW 2654 and in the case of VST Industries Ltd. v. Collector of Central Excise, Hyderabad AIR 1998 (SC) 1441 the observations wherein clearly show that when goods are sold on credit and interest is received that does not form part of the price on which excise duty is payable.
(ii) The interest received from banks on deposits pledged with it for obtaining letter of credit/bank guarantee A letter of credit is an undertaking by a banker to meet drafts drawn under by the beneficiary of the credit in accordance with the conditions laid down therein. A letter of credit is generally issued to another specified banker where the credit is designed to facilitate trade. Banks, to insure themselves generally ask for deposit to be kept with them for issuing the letter of credit. On such deposits banks grants interest obviously because assessees' money is used by the banks. Here also the bank deposit is the source from which the interest sprang. It is true that bank deposit was required to pledge with the bank to obtain the letter of credit which was necessary for carrying the business of the undertaking but by that the industrial undertaking does not become the direct source of interest earning. Even though the deposit has a commercial connection with the industrial undertaking, it is not an industrial undertaking by itself. Direct and effective source of interest income is the deposit. The sequence of events of earning interest suggests that industrial undertaking is degrees away from the effective source-industrial undertaking requires the letter of credit or bank guarantee; to obtain that a bank deposit is taken by the assessee and then it is given to the bank as the security; on security of this deposit bank then issues letter of credit. In this geology of deposit, security and industrial undertaking, the last one is a source two degrees away.
(iii) Interest received from IBDI on deposits pledged with it as required under Section 32AB of the Act This interest is earned on deposits with IDBI which is made to avail the benefit of deduction under Section 32AB of the Act. It is pursuant to a scheme formulated under the Act. Here also deposit is the source. Interest is earned from deposit made under a scheme.
Deposit is to be made after and out of profits earned and derived from the undertaking-a step away by a degree from the industrial undertaking, though incidental thereto. Interest Income is thus attributable to the business of the undertaking manufacturing articles or things and not derived from which is from deposit under a scheme.
(iv) Interest from sarafi and banks deposits out of initial/surplus funds This interest is earned on the surplus money which was earned by the industrial undertaking and to augment the income the undertaking.
Assessee solicits the distinction between initial fund and surplus/idle funds and the argument is that initial funds are deposited when the undertaking had not yet set on and that profit alone could be said to have not been derived from; in so far as funds generated from within the earnings of undertaking after it had started the interest income would be part and parcel of the undertaking. The fact however remains that income is earned from deposits made and not from industrial undertaking manufacturing or producing articles or things. This distinction may be valid for determining the income whether from business where only incidental connection is required to be established and determining whether income is derived from where the effective and direct source of first degree alone is to be established.
In general terms the insurance receipts are not income at all. The receipt is to reimburse the expenditure or to compensate for the loss incurred by an assessee and for which the assessee was insured.
See in this connection the decision of Supreme Court in the case of CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 wherein it was pointed out at page 626 that "As observed by the High Court, under the General Law if a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year, the amount remitted cannot be taxed as income of the year of the remittance, nor can the amount, for the year in which the liability was allowed, to be reopened or adjusted. Therefore, there is no liability of the recipient for the receipt of the aforesaid amount and the two assessees cannot be assessed under the general law for such refund." It is only because of a fiction created by Section 41(1) that it is deemed as income. By that deeming provision such receipt is treated as income if the assessee has been allowed a deduction thereof in computing its income of an earlier year. That fiction treats such receipts as income from business and does not provide further that it has to be treated as income derived from industrial undertaking as is required for granting deduction under Sections 80HH, 80HHA, 80-I and 80-IA as the case may be. It would be akin to balancing charge under Section 41(2) in Cambay Electricity with respect to which the court held a profit attributable to and had the term 'derived from' been used for granting the deduction the revenue case would have some force.
(vi) Sale of scrap, spare parts, sale of raw material & other misc.
Receipts In case the sale is of scrap generated by the undertaking during the course of production it would certainly be income derived from industrial undertaking. It is part and parcel of manufacturing process and activity of the industrial undertaking. If however scrap sale is not of industrial waste generated during manufacturing or producing process it may not be the income derived from industrial undertaking. As for sale of spare parts and of raw material and other misc. receipts are concerned, we hold that if it was a sale as an 'after sale service' condition or sale is of own manufactured spare parts of the receipt has arisen in the course of manufacture or production, it would be the income derived from industrial undertaking. On the other hand if it is an independent activity not conditioned to sale or manufacture or production it would not be an income derived from industrial undertaking even though it might be income attributable to Industrial undertaking as held by the Supreme Court in the case of Ashok Leyland Ltd. (supra).
56. On the aforesaid analysis we now dispose of the individual cases along with other grounds raised therein as under : (a) The assessee would be entitled to deduction under Section 80-I on : (i) Rs. 1,68,854, being sale of spare parts manufactured by the assessee, as the manufacture itself is by assessee's undertaking and also because it was a condition of sale as 'after sale service'.
(ii) Rs. 15,079, being rewinding charges, because it was a condition of sale as 'after sale service'.
(b) The assessee would not be entitled to deduction under Section 80-I on : (i) Rs. 39,402, being interest on late payment of sale proceeds, as the immediate source is the debt owed and not the industrial undertaking.
(c) The other dispute raised in this appeal is for the disallowance of interest on debit balance in partners capital account of Rs. 58,183. The money was advanced to and withdrawn by the partner in earlier year from bank account having credit balance and disallowance was deleted by the appellant authority on the ground that no borrowed money was utilized in such withdrawals by the partners. In this year again the money is withdrawn from bank account wherein the sale proceeds of the assessee are deposited which are much more than the withdrawals by the partners and no nexus is established by the revenue that borrowed money on which interest has been paid has been the source of withdrawals by the partners, no disallowance therefore is justified and the same is accordingly deleted.
(a) The assessee would be entitled to deduction under Section 80-I on : (i) that part of misc. receipts of Rs. 2,77,703, which represented the sale of scrap generated during the course of manufacture or production as it would be part of the process of manufacturing itself. Assessing Officer may verify and allow necessary relief.
(ii) that part of labour charges of Rs. 26,500 which was pursuant to the condition of sale as 'after sale service'. Assessing Officer may verify and allow necessary relief.
(b) The assessee would not be entitled to deduction under Section 80-I on : (i) Rs. 6,118, being interest from bank on credit balance and Rs. 4,69,036, being interest on late payment of sale proceeds, as the immediate source is the deposit or the debt owed and not the industrial undertaking.
(ii) Rs. 2,77,703, being insurance claim receipts, as it not an income and as the same is a deemed income by virtue of Section 41(1) only as business income and is not deemed as income derived from industrial undertaking.
(c) Other issues raised are not pressed in view of retrospective amendment.
(a) The assessee would not be entitled to deduction under Sections 80HH and 80-I on Rs. 10,18,920, being interest from bank on fixed deposits kept as money margin for the purpose of letters of credit for export and bank guarantees for excise payments. Interest is derived from the deposit of money with bank. The deposits have, of course, a commercial connection with the industrial undertaking,' it is not an industrial undertaking by itself. Direct and effective source of interest income is the deposit, the industrial undertaking is and could be said the ultimate source the enquiry must be stopped the moment the effective and direct source is founding the fixed deposit. The sequence of events of earning interest suggests that industrial undertaking is degrees away from the effective source- (a) The assessee would not be entitled to deduction under Section 80-I on : (i) Rs. 1,13,750, being interest from bank on short-term loans Rs. 99,198, interest on fixed deposits with banks Rs. 11,606 and interest on late payment from customers. Assessee's contention that it paid very heavy interest to GSFC of Rs. 9,41,099 and interest paid was to partly to meet the cost of interest paid and therefore it relates to and has a direct connection to industrial undertaking has no force. The interest payment and interest receipt are two different transactions and merely because assessee paid interest can not be a ground for holding that receipt is income derived from industrial undertaking. However to arrive at the income derived from the industrial undertaking the interest which is paid for earning this income has to be excluded. We, therefore, direct the Assessing Officer to exclude only the net interest income from the profits and gains shown in the profit and loss account to arrive at the income derived from the industrial undertaking.
(b) The assessee has been granted necessary relief by the Assessing Officer and the ground has been withdrawn before the CIT(A) therefore the ground regarding labour charges of Rs. 8,173 is misconceived and does not survive and is accordingly rejected.
(c) The other ground raised is for denying Section 80HHA deduction as Small Scale Industry because the value of its assets had exceeded Rs. 35 lakhs. There has been an amendment in the monetary limit by notification No. SO 232(E) dated 2nd April, 1991 issued by Ministry of Industries raising the limit to Rs. 60 lakhs. Assessing Officer may therefore look into this aspect and allow necessary relief to the assessee.
(a) The assessee would not be entitled to deduction under Section 80-I on : (i) 95,792, being trading sales as the receipts has not been derived from industrial undertaking. The alternate contention of the assessee that purchase cost of such goods sold has to be allowed and only the net income alone could be excluded from the profits to arrive at the income derived from the industrial undertaking has force and we direct the Assessing Officer to exclude only the net income from trading to arrive at the income derived from the industrial undertaking.
(ii) Rs. 29,305 being bank interest and Rs. 2,00,187, being interest from bank on short-term loans. Assessee's contention that it paid very heavy interest to GSFC and interest paid was to partly to meet the cost of interest paid and therefore it relates to and has a direct connection to industrial undertaking has no force. The interest payment and interest receipt are two different transactions and merely because assessee paid interest can not be a ground for holding that receipt is income derived from industrial undertaking.
However, to arrive at the income derived from the industrial undertaking the interest which is paid for earning this income has to be excluded. We, therefore, direct the Assessing Officer to exclude only the net interest income from the profits and gains shown in the profit and loss account to arrive at the income derived from the industrial undertaking.
(iii) The assessee has also claimed that it should be allowed deduction on commission receipts on purchase of raw material. Its claim is that the receipts are not for any agency activity, (though normally commission is received for some agency services) but on its own purchase of raw material and, therefore, it would reduce the cost of raw material. Assessing Officer may verify this fact and allow necessary relief in case he finds that the commission was received on purchase made and used as raw material for its production or manufacture of articles or things as envisaged in Section 80-I of the Act.
(b) The other ground raised is for denying Section 80HHA deduction as Small Scale Industry because the value of its assets had exceeded Rs. 35 lakhs. There has been an amendment in the monetary limit by notification No. SO 232(E) dated 2nd April, 1991 issued by Ministry of Industries raising the limit to Rs. 60 lakhs. Assessing Officer may therefore look into this aspect and allow necessary relief to the assessee.
(a) The assessee would not be entitled to deduction on Rs. 4,80,838 under Section 80-IA the successor provision on the lines of Section 80-I, it being interest from customers on late payment of sale proceeds, as the immediate source is the debt owed and not the industrial undertaking.
(a) The assessee would not be entitled to deduction under Section 80-IA the successor Section to 80-I on interest of Rs. 3,18,701 from bank on fixed deposits kept as money margin for the purpose of letters of credit for export and bank guarantees for excise payments. Interest is derived from the deposit of money with bank.
The deposits have of course, a commercial connection with the industrial undertaking, it is not an industrial undertaking by itself. Direct and effective source of interest income is the deposit, the industrial undertaking is and could be said the ultimate source but the enquiry must be stopped the moment the effective and direct source is founding the fixed deposit. The sequence of events of earning interest suggests that industrial undertaking is degrees away from the effective source.
(b) The other disputes in the Revenue's appeal is deletion of disallowance of Rs. 24,096 out of telephone expenses Rs. 34,600 out of vehicles expenses and Rs. 6,689 out of depreciation on vehicle.
These two amounts have been disallowed by the Assessing Officer on account of personal use by the directors. The CIT(A), however, deleted the same by following the decision of the Tribunal in the case of Jival Ltd. wherein it was held that no disallowance of personal use of the vehicles/telephone by the directors/officials can be made in the hands of the company. We find that in similar circumstances, the Gujarat High Court in the case of Sayaji Iron & Engg. Co. (supra) held that there cannot be any personal expenditure so far as the company is concerned. The company is an artificial person and, therefore, the question of expenditure being personal in nature does not arise. Any expenditure incurred by or for the directors of the company would be wholly and exclusively laid down for the purposes of business of the assessee. Respectfully following the decision of jurisdictional High Court, the order of the CIT(A) is upheld. (c) The next ground is against deletion of disallowance of Rs. 6,90,246 being excess remuneration paid to the managing director.
The Assessing Officer noticed that in the financial year 1989-90, the remuneration to the managing director Shri M.G. Punatar was paid at Rs. 98,740 which has been increased to 10 times during the financial year under consideration. The increase was justified by the assessee by the fact that Shri Punatar was a technocrat who had good experience in the similar line of business and there has been a substantial increase in the business of the assessee during the past two-three years. Assessing Officer however referred to the resolution dated 7-4-1988 passed by the company appointing the managing director wherein it is stated that the managing director is appointed for a term of five years on a salary of Rs. 7,500 per month with the perquisites and conveyance in the shape of rent-free accommodation, car, provident fund, etc. He observed that the terms of employment of the managing director have not been revised although the quantum of remuneration paid to him has been approved in the Annual General Meeting, since it was a fait accompli. The Assessing Officer applied the provisions of Section 40A(2)(b) and observing that the assessee has failed to prove the reasonableness of 10 times increase in the salary of managing director, held that the amount paid in excess of Rs. 3 lakhs was unreasonable and disallowed Rs. 6,90,246. The CIT(A) allowed the claim of the assessee by observing as under: 8.2 I have considered the facts of the case, submission made by the appellant and the evidence furnished. The statement by the Assessing Officer in the assessment order to the effect that the terms of employment of the Managing Director appointed on 7-4-1988 have not been subsequently revised, is not correct. The terms of employment of the Managing Director have been revised vide resolution dated 5-4-1990 passed by the Board of Directors of the company. A copy of this resolution has been filed. It is also seen that this resolution dated 5-4-1990 has been discussed in detail in para 7 of CIT(A)-VII, Ahmedabad's order dated 15-3-1994 in appellant's case for the assessment year 1991-92 and similar disallowance of Rs. 3,88,119 made out of remuneration paid to the Managing Director has been deleted. The Assessing Officer's order dated 28-3-1995 has been passed subsequent to the CIT(A)'s order dated 15-3-1994 for the assessment year 1991-92. From the figures of net profit of the company for the various assessment years furnished by the appellant, it is seen that there was continuous growth and progress of the company after the joining of the Managing Director on 7-4-1988 and the net profits of the company for the periods ending March, 1989, March, 1990, March, 1991 and March, 1992 were of Rs. 2.97 lakhs. Rs. 21.56 lakhs, Rs. 49.70 lakhs and Rs. 92.901 lakhs respectively.
Considering these facts, the remuneration paid to the Managing Director equal to 10 per cent of the net profit of the company was reasonable and was paid for business consideration. Therefore, considering the facts on record and CIT(A)'s order for the assessment year 1991-92 the Assessing Officer was not justified in disallowing a sum of Rs. 7,90,246 out of the remuneration paid to the Managing Director. The disallowance made is, therefore, deleted.
We are informed that the said order of the CIT(A) in assessment year 1991-92 has been upheld by the Tribunal in Kalpataru Power Transmission Ltd.'s case (supra) vide discussion in paragraph 9 as under : 9. Ground No. 2 is against the deletion of disallowance of Rs. 3,88,119 in respect of excessive remuneration paid to Shri M.G. Punatra, Managing Director of the asscssec-company. The Assessing Officer has discussed the facts vide para 4 of the assessment order.
The Assessing Officer noted that the asscssee has paid remuneration to the Managing Director amounting to Rs. 5,85,615 during the year under reference as against the amount of Rs. 98,748 paid in the preceding year. There was thus enhancement to the extent of 600 per cent in the remuneration paid to the Managing Director. The Assessing Officer called upon the asscssee to explain the reasons for the substantial increase in the remuneration to the Managing Director. The assessee explained that after the demise of the earlier Managing Director, who was also one of the promoters of the assessee-company in November, 1986, the company was in search of a suitable person for an appointment as its Managing Director Shri M.G. Punatra a Technocrat with experience in similar line of business was appointed as Managing Director on 7-4-1988 as per Board of Resolution as under : 'Managing Director shall during the term of five years from his appointment continue to serve the company as M.D. and shall give whole-time attention to management and necessary affairs of the company and shall use his best endeavour and efforts to improve and extent overall business of the company. The M.D. shall be entitled to salary of Rs. 7,500 p.m. Apart from above, the perquisite and conveyance in the shape of rent-free accommodation, car, P.F. etc.
also given.' The assessee further submitted that due to untiring efforts of Shri Punatra the company achieved a turn around as reflected in the following figures : The Board of Directors accordingly vide resolution dated 5-4-1990 resolved to enhance the remuneration of Shri Punatra substantially and passed the following resolution on 5-4-1990.
'The Managing Director shall be entitled to the remuneration calculated at the rate of 10 per cent of net profits of the company for the financial year computed in the manner laid down in Section 349 of the Companies Act, 1956 [subject to deducting the depreciation to the extent allowable under the Income-tax Act, 1961 instead of specified in Section 350 as stated in Sub-clause (K) of Clause (4) of the said Section 349] and except that the remuneration to director shall not be deducted from the gross profit over and above the existing salary of Rs. 7,500 per month.' The assessee-company justified the enhanced remuneration to the managing director by pointing out that in the subsequent years the net profits of the company reached the figure of Rs. 92.91 lakhs for the assessment year 1992-93 as against Rs. 3.3 lakhs for the assessment year 1988-89. It was further pointed out that the enhanced remuneration paid to the Managing Director is not motivated by tax saving consideration inasmuch as the Managing Director as an individual has been taxed at the highest slab being 56 per cent whereas such amount would have offered tax in the hands of the assessee-company at the rate of 38.8 per cent only. The Assessing Officer however rejected the explanation and held that increase in remuneration to the Managing Director would be reasonable to the extent of 100 per cent as against 600 per cent allowed by the assessee-company. The Assessing Officer accordingly disallowed the claim of Rs. 3,88,119 as excessive remuneration paid to the Managing Director.
(d) The facts and circumstances being similar, we uphold the order of CIT(A) on this issue.
(a) No deduction under Sections 80HH and 80-I would be available to the assessee : (i) on Rs. 12,014 being interest from bank on fixed deposits kept as money margin for the purpose of letters of credit for export.
Interest is earned from the deposit of money with bank, and not an income derived from industrial undertaking.
(ii) on Rs. 6,06,715 being net interest income consisting of interest from customers and other loans. It being interest on late payment of sale proceeds, and the immediate source is the debt owed or the deposit and not the industrial undertaking also because the assessee has raised no objection before the Assessing Officer for treating such interest income as assessable under the head 'Income from other sources.' (b) The next dispute raised in this appeal is treatment of interest income of Rs. 6,18,725 and lease rent of Rs. 2,16,000 as income from other sources. On hearing the parties we find that interest on margin money and on outstanding amount from customers has a connection with the assessee's business and therefore should be assessed under the head 'business income'. As regards the interest on loans and advances are concerned this would be income from other sources as also conceded by the assessee before the Assessing Officer. We accordingly direct the Assessing Officer to recompute the income under the respective head and after taking into consideration the expenditure of interest relatable thereto.
Allocation of expenditure to different heads may also be reconsidered after giving an opportunity of being heard.
(a) The assessee would not be entitled to deduction under Section 80-I on the following the income of Rs. 3,37,710 consisting of: Interest is earned from the deposit of money with Excise Department in one case and Mafatlal in the other case, and not an income derived from industrial undertaking.
Interest income consisting of interest from customers and export bills is income from interest on late payment of sale proceeds, and the immediate source is the debt owed or the deposit and not the industrial undertaking also because the assessee has raised no objection before the Assessing Officer for treating such interest income as assessable under the head "Income from other sources" (v) Rs. 17,028 being interest from electricity board on electricity, Deposit. The immediate source of interest was the deposit itself and the effective source in geneology of the source of interest income is the deposit and not the business as the industrial undertaking is removed by one step from the source of income for the interest. It is true that the deposit might be an incidental investment with the business of the industrial undertaking but that would not be sufficient to render the interest income as profits and gains derived from industrial undertaking.
The CIT(A) has not allowed any deduction on these items (vi), (vii) and (viii) though he has included the last item (viii) in the sum of Rs. 1,93,345 while directing for allowing 80-I deduction. Thus no deduction on any of the items aforesaid is allowable to the assessee. Order of the CIT(A) is accordingly reversed.