DY. COMMISSIONER OF INCOME TAX V. ARAT ELECTRO CHEMICALS LTD.

TAXAP/18/1999

AI Insights

The case involves the Deputy Commissioner of Income Tax as the appellant and Arat Electro Chemicals Ltd. as the respondent. The core issue was whether the interest income from specific deposits and securities qualifies for deduction under section 80-I of the Income Tax Act, 1961. The Assessing Officer initially excluded these interest incomes from the profits and gains of the industrial undertaking, a decision upheld by the Commissioner (Appeals) but reversed by the Tribunal. The Revenue appealed to the High Court, which ultimately ruled in favor of the Revenue, citing lack of direct nexus between the interest income and the industrial undertaking.

• Counselvise Citation: [2008] 140 COUNSELVISE.COM (IT) 745004 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-06-2008
• Assessment Year: misc
• Other Referred Cases: PANDIAN CHEMICALS LTD. vs. C.I.T., COMMISSIONER OF INCOME TAX vs. STERLING FOODS
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: VARUN PATEL
• Assessee Lawyers: B B NAIK
• Keywords: Appellate Tribunal; Deduction; Fixed deposit receipts; Income Tax; Industrial Undertaking; Interest income; Letters of Credit; Electric Department
• Section: 80-I

Judgement Text

"TAXAP/15/1999 1/5 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 15 of 1999 WITH TAX APPEAL No. 18 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MR.JUSTICE H.B.ANTANI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= DY. COMMISSIONER OF INCOME TAX Versus ARAT ELECTRO CHEMICALS LTD. ========================================================= Appearance : MR BB NAIK for Appellant. MR VARUN PATEL for MR. SN SOPARKAR for Opponent. ========================================================= CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE H.B.ANTANI Date : 23/06/2008 TAXAP/15/1999 2/5 JUDGMENT COMMON ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) At the time of admission, the following identical question of law was formulated by this Court in both these appeals, vide order dated 21.02.2000: “Whether, the Appellate Tribunal is right in law and in facts in holding that the assessee is entitled to deduction under section 80-I in respect of the interest income earned on the securities kept with the electric department as well as the interest income earned on FDRs kept for margin money for obtaining letters of credit for the procurement of raw materials?” The appeals are relatable to A.Ys. 1990-91 and 1991- 92 respectively. As common issue is involved, the appeals are heard together and disposed of by this common order. The Assessing Officer came to the conclusion that while working out relief under section 80I of the Income Tax Act, 1961 [the Act], interest to the tune of Rs.1,85,922/- for A.Y. 1990-91 and interest to the tune of Rs.1,97,340/- for A.Y. 1991-92 was not includible in the profits and gains derived from industrial undertaking as the said items of interest had no direct nexus with the industrial undertaking. The assessee carried the matter in appeal for both the years before the Commissioner (Appeals) who agreed with the view of the assessing officer. However, in the second appeal before the Tribunal, the assessee succeeded. TAXAP/15/1999 3/5 JUDGMENT The Tribunal has given break-up of the total interest as having been earned from: (i). Securities kept as deposit with electricity department, and, (ii).Fixed Deposit Receipts kept with Bank as margin money. According to the Tribunal, the interest income earned on security deposit from the electricity department was required to be included in the profits and gains derived from industrial undertaking because without an electric connection, the industrial undertaking was not in a position to operate. Similarly, insofar as the second item of interest is concerned, the Tribunal came to the conclusion that for the purposes of procuring imported raw materials, the assessee was required to furnish Letters of Credit which were made available to the assessee only upon the assessee depositing margin money with the Bank in the form of Fixed Deposits. Thus, according to the Tribunal, the assessee was entitled to deduction under section 80.I of the Act by including the aforesaid two items of interest. On behalf of the appellant-Revenue, in the present two appeals, Mr. B.B. Naik, learned Standing Counsel submitted that the issue is no longer res-intergra, and for this purpose, placed reliance on the Apex Court's decisions in the case of PANDIAN CHEMICALS LTD. vs. C.I.T. Reported in [2003] 262 ITR 278 and also in the case of COMMISSIONER OF INCOME TAX vs. STERLING FOODS reported in [1999] 237 ITR 579 to submit that both the items of interest were required to be excluded from the TAXAP/15/1999 4/5 JUDGMENT total figure of profit and gains which were eligible for relief under section 80.I of the Act. On behalf of the respondent assessee, Mr. Varun Patel, learned advocate appearing for Mr. S.N. Soparkar, senior advocate, submitted that the learned counsel for Revenue was correct in pointing out that the issue was concluded by the aforesaid two decisions of the Apex Court. In the case of PANDIAN CHEMICALS LTD [supra] the Apex Court has stated that the words “derived from” must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. In a case of similarly situated assessee, the Apex Court further went on to state as under: “Although electricity may be required for the purpose of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself.” Applying the aforesaid ratio to the facts of the case, the questions relatable to both the appeals are required to be answered in the negative, i.e. in favour of the Revenue and against the assessee. The appeals are allowed accordingly. No order as to costs. [D.A.MEHTA, J.] TAXAP/15/1999 5/5 JUDGMENT mathew [H.B.ANTANI, J.] "