Shiva Shankar Granites (P) Ltd. Vs. Income Tax Officer - Court Judgment

Excerpt:
1. this is an appeal filed by the assessee. it is directed against the order of the cit(a)-iii, hyderabad, dt. 1st jan., 1997, for the asst.yr. 1993-94, wherein he disallowed the claim of the assessee that certain receipts of the assessee, by way of interest, are eligible for exemption under s; 10b of the it act, and consequently confirmed the assessment made by the ao on an income of rs. 9,670.2. facts of the case lie in a very narrow compass, but the issue thrown up is quite controversial. the appellant-company is engaged in export of granites. it is a hundred per cent export-oriented unit, and hence claimed that its income was exempt under s, 10b of the it act. the income of the assessee included the following two interest amounts on deposits, aggregating to rs. 9,674 : add :.....

Judgment:
1. This is an appeal filed by the assessee. It is directed against the order of the CIT(A)-III, Hyderabad, dt. 1st Jan., 1997, for the asst.

yr. 1993-94, wherein he disallowed the claim of the assessee that certain receipts of the assessee, by way of interest, are eligible for exemption under S; 10B of the IT Act, and consequently confirmed the assessment made by the AO on an income of Rs. 9,670.

2. Facts of the case lie in a very narrow compass, but the issue thrown up is quite controversial. The appellant-company is engaged in export of granites. It is a hundred per cent export-oriented unit, and hence claimed that its income was exempt under s, 10B of the IT Act. The income of the assessee included the following two interest amounts on deposits, aggregating to Rs. 9,674 : Add : Municipal taxes debited to P&L a/c but already considered in the above computation The assessee claimed that the above interest income alongwith its other income is exempt from tax under Section 10B of the Act. 'The AO negatived the claim of the assessee, to the extent it related to the above receipts of interest, and treated the said interest income as income assessable under the head 'Other sources'. Accordingly, he rejected the claim for exemption on the above income, and levied tax thereon.

3. On appeal, the CIT(A) upheld the action of the AO. He held that what is exempt under Section 10B is only profit derived from the exports made by the assessee. He observed that the term 'derived from' has a narrower meaning than the term 'attributable to', as explained by the apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. v.CTT (1978) 113 ITR 84 (SC). He held that even though a particular item of income may be assessable under the head 'business' on account of the fact that it is attributable to the business, the said item of income cannot be treated as having been derived from the said business, and so not eligible for exemption under Section 10B of the Act. In support of the view taken by him, he also relied on the following decisions, apart from the one (1978) 113 ITR 84 (SC) (supra) noted above : (2) CIT v. Eastern Sea Foods Exports (P) Ltd. (1995) 215 ITR 64 (Mad); and The concluding remarks of the CIT(A) in the impugned order are as under : "12. Considering the catena of decisions, as I have referred to above, the picture that emerges is that if the undertaking or the business is the direct and effective source of the profit and gains, the same could be treated to have been 'derived from' the undertaking. Any receipt which is peripheral to the business cannot be treated to have been derived from the business. In other words, if I may say so, every business or undertaking has a core and a penumbra. Core of the business signifies the fact that the business or undertaking is the direct or immediate source of the profit. When the profits and gains belong to penumbra, it means, it is peripheral and indirectly related. The question to decide, therefore, is whether a particular profit and gain relate to the penumbra or to the core.

13. Coming to the instant case, even if the amount deposited in the bank is" a trade surplus from the export business, the interest earned thereon can at best be "attributable to" the business but cannot be treated to have been derived from the business since the export business is not the immediate or effective source of such interest income. Therefore, I am of the opinion that the AO was justified in not allowing the exemption under Section 10B on interest income.

14. As regards the decisions cited by the learned authorised representative, these are mainly on the issue as to whether interest earned from bank under certain circumstances would be treated as business income or not. But as I have pointed out, it is not enough if merely an item relates to the business. To qualify for exemption under Section 10B, it must have been 'derived' from the business. In the instant case, the interest is not derived from the business and therefore, would not Qualify for exemption under Section 10B. As regards Circular No. 684 dt. 10th June, 1994 this is merely an explanatory note to the amendment to Section 10B-by the Finance Act, 1994, by which conditionality was introduced to the effect that if at least 75 per cent of the turnover is exported, the assessee will qualify for exemption under Section 10B. I do not see how this circular is of any help to the assessee. 15. In view of the above discussion, the assessment order is confirmed. In the result, the appeal is dismissed." 4. Before me, the learned counsel for the'assessee reiterated the contentions made out before the Revenue authorities. Firstly, he explained that the interest amount of Rs. 6.484 was earned on fixed deposits given as margin to the bank to obtain bank guarantee in favour of the Central Excise and Customs Department. When this fact was desired to be established, learned counsel filed before me" a certificate of Andhra Bank dt. 3rd Sept., 2001, which reads as under : "We certify that the interest accrued on the Fixed Deposits given as margin to the Bank Guarantees taken in favour of Central Excise & Customs Department in the financial year 1992-93 is approximately Rs. 6,484 against deposits 750/92/418, 241, 625 & 93/14/922..." It is also explained that the deposit with the A.P.S.E.B., which earned interest o( Rs. 3,190, was made in connection with securing electricity connection. I invited the attention of the learned counsel for the assessee to the decision of the Hon'ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad), wherein it was held in the context of Section 80HH of the IT Act, that interest on deposit with Electricity Board, even though made out of the statutory compulsion, cannot be regarded as profit derived from industrial undertaking, and so cannot be taken into account in computing the special deduction under Section 80HH of the Act. I have also invited the attention of the learned counsel for the assessee to the decision of the apex Court in CIT v. Sterling Foods (1999) 237 ITR 579 (SC).

Wherein it has been held that profits from sale of import entitlements cannot be held as profits derived from industrial undertaking, and so such profits cannot be included in income for computing special deduction under Section 80HH of the IT Act. These two decisions were not referred to by the CIT(A) and these two authorities have to be considered along with other decisions relied upon by the CIT(A) to which we have referred to hereinabove.

5. The learned counsel for the assessee pleaded that the decision of the Hon'ble Madras High Court in Pandian Chemicals Ltd.'s case (supra) and also the decision of the apex Court in Sterling Food's case (supra) were not rendered in the context of provisions of Section 10B of the IT Act. According to him, the provisions of Section 10B stand on different footing than the other provisions like Section 80HH, Section 80-I and Section 80HHC of the Act. It is claimed that Section 10B figures in Chapter-III, which grants complete exemptions to incomes of different nature, whereas the other sections noted above figure only in Chapter-VI of the Act, which do not grant such complete exemption. In his written submissions filed, the learned counsel for the assessee relied upon the decision of the Bombay High Court in CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom); and of the Delhi Bench of the Tribunal in Honda Siel Power Products Ltd- v. Dy. CTT (2000) 69 TTJ (Del) 97 : (2001) 77 ITD 123 (Del), wherein it has been held that interest income has to be treated as income derived from the industrial undertaking for the purposes of granting deduction under Sections 80HH and 80-I. It is also mentioned that while coming to this conclusion, the Delhi Bench of the Tribunal has duly considered the Hon'ble Madras High Court decision in the case of Pandian Chemicals Ltd. (supra) and the decisions of the apex Court in the cases of Sterling Foods (supra) and Cambay Electric Supply Industrial Co. Ltd. (supra).

6. The learned Departmental Representative, on the other hand, strongly supported the orders of the Revenue authorities. Reiterating the reasoning given by the CIT(A) in the impugned order, the learned Departmental Representative especially relied on the decisions of the apex Court in Sterling Foods case (supra)', and of the Madras High Court in Pandian Chemicals Ltd.'s case (supra). He also relied on the following other decisions : (a) CIT v. Siddaganga Oil Extractions (P) Ltd. (1993) 201 ITR 968 (Kar) 7. Notwithstanding the above decisions cited by the learned Departmental Representative, I am of the view that the assessee deserves to succeed. However, this is not to agree with the distinction sought to be made by the learned counsel for the assessee between the provisions of Section 10B and other sections like Sections 80HH and 80-I. The provisions of Section 10B of the IT Act read as under: "1 OB(1)--Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export-oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any undertaking which fulfils all the following conditions, namely, From the specific language of the section, it is evident that what is exempted under Section 10B is profits and gains 'derived' from the hundred per cent export-oriented industrial undertaking. In the light of the decision of the apex Court in the case of Cambay Electric Supply Industrial Co, Ltd. (supra), relied on by the CIT(A), it is clear that the connotation of the words 'derived from' is much narrower than the expression 'attributable to'. This distinction has to be maintained whether the expression 'derived from' occurs in Section 10B or in other provisions of the Act like Sections 80HH and 80-I. So, the question to be considered is whether the interest income in question aggregating to Rs. 9,674 is derived from the industrial undertaking. Without an electrical connection, it appears, the assessee cannot conduct its manufacturing activity, and so, the deposit with the A.P.S.E.B. is a pre-requisite for the carrying on of its manufacturing activity by the assessee. In the light of this circumstance, it appears to me that the interest income is integrally related to the conduct of the business by the assessee, and it may have to be treated not simply as attributable to the business of the assessee, but derived from the business of the assessee. I may admit at the outset that this conclusion goes contrary to the decision of the Hon'ble Madras High Court in the case of Pandian Chemicals Ltd. (supra), wherein it has been held, in the context of relief claimed under Section 80HH in relation to interest on deposits made with the Tamil Nadu Electricity Board, that the immediate and effective source of the interest was the deposit and not the industrial undertaking; and that the fact that the amount was assessable as business income would not be sufficient to hold that the interest income was derived from the actual conduct of the industrial undertaking. In the face of this decision of the Hon'ble Madras High Court, my only defence is that there are certain other decisions, which hold a contrary view on this issue, and I shall refer to those decisions hereinafter.

8. In the case of CIT v. Nagpur Engg. Co. Ltd. (2000) 245 ITR 806 (Bom), the Hon'ble Bombay High Court, following its earlier decision in CIT v. Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom) held as under : "Held, that the Tribunal was justified in directing the AO to treat the interest income from fixed deposits as eligible profits of the business while computing the deduction under Section 80HHC and Section 80-I of the IT Act, 1961." In the case of Paramount Premises (P) Ltd. (supra) the Hon'ble Bombay High Court held as under : "Held, that the Tribunal had given a finding of fact that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. The Tribunal was justified in holding that the interest was assessable as income from business and no question of law arose from its order." It may be observed that the provisions of Section 80HHC and Section 80-I, allowing deductions from the profits and gains of the business, considered by the Hon'ble Bombay High Court in the case of Nagpur Engg.

Co. (supra) have also used the same term 'derived from' as in S..10B.So, the ratio of the decisions of the Hon'ble Bombay High Court equally holds good, while considering the provisions of Section 10B. It may also be noticed that the SLP filed by the Department against the Bombay High Court decision in CIT v. Paramount Premises (P) Ltd (supra) has been rejected by the apex Court (244 ITR (St) 54).

9. From the above decisions, it appears to me that there is a cleavage of judicial opinion in the matter, and hence I prefer to give the benefit of doubt to the assessee, in the light of remarks of the Hon'ble Bombay High Court quoted approvingly by the Hon'ble Andhra Pradesh High Court in the case of State of Andhra Pradesh v. CTO and Anr. (1988) 169 ITR 564 (AP) at pp 571 and 572 of the Reports as follows.

"So far as the legal position is concerned, the ITO would be bound by a decision of the Supreme Court as also by a decision of the High Court of the State within whose jurisdiction he is (functioning), irrespective of the pendency of any appeal or special leave application against that judgment. He would equally be bound by a decision of another High Court on the point, because not to follow that decision would be to cause grave prejudice to the assessee.

Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is (functioning), but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him. Similarly, if the Tribunal has decided a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee." 10. For the view I am taking in the matter, I also find support from the decision of the apex Court in the case of CIT v. Kamal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC), wherein it has been held as under : "Held, that, in the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest had been earned. This was, therefore, not a case where any surplus share capital money which was lying idle had been deposited in the bank for the purpose of earning interest. The deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset." It may be observed that the apex Court has specifically held that the deposit of surplus share capital money, which was lying idle, was directly linked with the purchase of plant and machinery, and so the interest earned on such deposit deserves to be reduced from the capital costs of plant and machinery. What is directly linked to the business must be held as 'derived from' the business and not as something 'attributable to' it. This is in a situation where the business is in construction stage and is not yet set up. It appears that the same logic holds good in the case of interest derived from the deposit with the Electricity Board and the deposit given as margin money for obtaining bank guarantee, after the business is set up and in the course of conduct of the business. So, I am of the view that the interest income earned on deposit with the Electricity Board for obtaining electricity connection, and on the deposits made with the bank for obtaining bank guarantee deserves to be treated as having been 'derived from' the export-oriented unit, within the meaning of Section 10B of the IT Act.

11. Before parting with the matter, I may also mention that the other decisions relied on by the learned Departmental Representative are distinguishable. In the case of Sterling Foods (supra), the apex Court came to the conclusion that the profits derived from sale of import entitlements is not derived from the industrial undertaking within the meaning of Section 80HH because the profit is relatable to a separate scheme of the Central Government, whereunder the export entitlements became available. It appears to me that the deposits made with the bank cannot be placed on par with the scheme of the Central Government whereunder export entitlements became available. Making of deposit for obtaining electricity connection is so integrally connected with the manufacturing activity that it cannot be regarded as a separate source from which any income by way of interest is derived.

12. I need not separately consider the decision of the Hon'ble Karnataka High Court in Sterling Foods (supra), having considered the same in the context of the decision of the apex Court in that very case in the preceding para.

13. In the case of Mrs. Bacha F. Guzdar (supra), the apex Court was considering dividend income received by a shareholder from a company, which derived income from agriculture, and held that the dividend received by the shareholder was not agricultural income, but income assessable under Section 12 of the Indian IT Act, 1922. It was held that the dividend received did not have any association with land, but arose from the contractual relation between the company and the shareholder. I am of the view that this decision has no bearing on the issue before me in this case.

14. In the case of Siddaganga Oil Extractions (P) Ltd. (supra), it was held that income by way of lorry hire, weighment-charge, miscellaneous receipts and income from fixed deposits could not be included in the profits of the business for calculating deduction under Section 80HH in respect of newly established industrial undertakings in backward areas.

This decision proceeded on the basis that the industrial undertaking should be the direct source of profit and the income derived by the assesses from any other source cannot be held to be the income derived from the industrial undertaking. It appears that the decision in this case is contrary to the decision of the Bombay High Court in the case of Nagpur Engg. Co, Ltd. (supra), and also the decision of the apex Court in the case of Kamal Co-operative Sugar Mills Ltd. (supra). I have already given our reasons for following the decision of the Bombay High Court in Nagpur Engg. Co. Ltd. 's case (supra).

15. In the case of Cement Distributors Ltd. (supra), it was held by the Hon'ble Delhi High Court that the income derived by leasing out of the entire undertaking to another party, cannot be regarded as income derived from the running of the industrial undertaking. This situation is totally different from what we have to consider in the present case.

The interest income is derived in the present case in the course of actual running of the undertaking by the assessee and not otherwise.

So, I am of the view that this decision is not applicable at all to the facts of the present-case. .

16. In the case of North East Gases (P) Ltd. (supra) relied upon by the CIT(A) in the impugned order, Hon'ble Gauhati High Court held that interest income arising on account of surplus funds available with the assessee cannot be regarded as income derived from the industrial undertaking for the purposes of granting deduction under Section 80HH.It also held that profit on sale of fixed assets is only conversion of property to money and does not form part of profits and gains derived from industrial undertaking. In the case before me, there is no deposit of surplus funds. The deposits are made not because there are surplus funds, but because, they are necessary for obtaining electrical connection, which is a prerequisite for the manufacturing activity of the assessee; and for obtaining bank guarantees, which also essential for the purchase of plant and machinery. The issue of sale of fixed assets does not arise in the present case. Hence, I am of the view that the said decision of the Gauhati High Court does not apply to the present case.

17. At this stage, I may also refer to the decision of the apex Court in the case of Cambay Electric Supply Industries Co. Ltd. (supra), wherein it has been held as under : "As regards the aspect emerging from the expression 'attributable to' occurring in the phrase 'profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) of which the learned Solicitor General relied, it will be-pertinent to observe that the legislature has deliberately used the expression 'attributable to' and not the expression 'derived from'. 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 building cannot be regarded as profits and gains derived from the conduct of the business of generatioh and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wider import, namely, 'attributable', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." In appears that the above observations of the apex Court are only an authority for the proposition that the connotation of the expression 'derived from' is narrower than the term 'attributable to'. On the specific issue whether the balancing charge from the sale of fixed assets can be regarded as profit derived from the conduct of business, the apex Court only mentioned that it could be argued 'with some force' that such profit is not derived from the conduct of business. But, it appears that the apex Court really did not decide this issue in the said decision. Actually, that decision ultimately went in favour of the assessee on the ground that the expression used in Section 80E, as it stood during the relevant period was 'attributable to', and so, the balancing charge derived by the assessee on the sale of old . machinery was eligible for deduction under Section 80E of the Act. What would have been the decision of the apex Court on the issue, if the expression used had been 'derived from', can only be guessed, and it cannot be positively inferred that the decision would have been unfavourable to the assessee. I am of the view that no specific conclusion about the position of profits by way of balancing charge, can be drawn from the remarks made by the apex Court in the course of this decision.

18. In the case of Hindustan Lever Ltd. v. CIT (1979) 121 ITR 951 (Bom) relied upon by the learned CIT(A), the issue before the Bombay High Court was in relation to savings earned by import entitlement, and it was held that the savings could not be treated as profits from export business under Section 2(f)(i) of the Finance (No. 2) Act, 1962. The issue as to whether savings could be equated to profits is altogether a different issue and does not arise in the appeal before me.

19. The legal principle laid down by the apex Court as early as in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) is that when the expression used in a particular provision is 'derived from', the industrial undertaking itself has to be the source of the profit, but the expression does not seem to rule out certain receipts, which are intimately and integrally connected to the conduct of the business. In the case of Kamal Co-operative Sugar Mills Ltd. (supra), the apex Court held that the interest derived by the deposit of share capital which is lying idle is directly linked with the business of the assessee and the income earned on such deposits is incidental to the business of the assessee. I have already extracted the relevant portion of the above decision. I have also observed that what is directly linked to business has also to be-regarded as 'derived from' it. In the case before me, the deposits made were not out of surplus funds or out of idle funds, but the deposits were a precondition for the conduct of the business.

So, I am of the view that the assessee in the case on hand, is on a safer ground than the assessee considered by the Hon'ble Supreme Court in the case of Kamal Co-operative Sugar Mills Ltd, (supra). The only difference is that in that case, the assessee was in the preconstruction stage and in the case on hand, the assessee-undertaking is actually in the stage of conducting or carrying on of the business.

I have already referred to the decision of the Hon'ble Bombay High Court in the case of Nagpur Engg. Co. Ltd. (supra), which is in favour of the assesses.

20. I also find that the view taken by me finds support from the decision of the Madras Bench of the Tribunal in the case of Ambika Cotton Mills Ltd. v. Jt. CIT (2001) 71 TTJ (Mad) 871, wherein as per the relevant portion of the headnote, it was held as under: "AO directed to verify whether the deposits and guarantees were given by the assessee to the State Electricity Board as a precondition for supply of power for running its factory; if that is so, he is to treat the interest income as part of profits and gains of the industrial undertaking and allow deduction under Sections 80HH ahd'80-I in respect of said income." Similar view it also taken by the Delhi Bench of the Tribunal in Honda Siel Power Products Ltd.'s case (supra), wherein as per the relevant portion of the headnote, it was held as under : "The link of the investment was inextricably in nature of business because the assessee was paying interest on its borrowings, which were for the purpose of business and the business of the assessee was a seasonal one and, accordingly, for few months funds were surplus and those funds were invested for a short period, so that the idle money could be utilised and the burden of the payment of interest could be lessened. Therefore, the assessee reduced the interest payment from interest income and net of both the items was taken into P&L a/c. Therefore, the amounts received by the assessee were inextricably linked with the process of business. Therefore, the interest income should be treated as business income.

The netting of the two interests had to be allowed in the instant case. Thus, the assessee was entitled to deduction under Section 80HHC in respect of the interest income.

As regards the deduction under Sections 80HH and 80-I, these deductions had also to be allowed to the assessee because the unit of the assessee was an industrial undertaking and the interest income was interest derived from industrial undertaking." As already noted, in that decision, the Tribunal (Delhi Bench) took into consideration, the decision of the Madras High Court in the case of Pandian Chemicals Ltd. (supra) and of the apex Court in Sterling Foods case (supra).

21. For the foregoing reasons, I hold that the aggregate amount of Rs. 9,674 deserves to be considered as income derived from the export-oriented unit, within the meaning of Section 10B.22. In the circumstances, I hold that the aggregate, amount of Rs. 9,674 received by the assessee, is also includible in the profits of the assessee's export business, qualifying for exemption under Section 10B of the Act. I accordingly set aside the orders of the Revenue authorities, and direct the AO to allow exemption on this amount of Rs. 9,674 as well.