Appeal details
Counselvise Citation
[2010] 135 COUNSELVISE.COM (IT) 9576 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 9 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
07-10-2010
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
C
Next Hearing Date
07-10-2010
Assessment Year
2005-2006
Appeal Filed On
10-12-2007
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MAHAVIR SINGH,JM & SHRI A N PAHUJA,AM ITA NO.4374/AHD/2007 (ASSESSMENT YEAR:-2005-06) LINCOLN PHARMACEUTICALS LTD., 2 ND FLOOR, NIRAV COMPLEX, KHANIJ BHAVAN, NEAR NAVRANG HIGH SCHOOL, NARANPURA, AHMEDABAD [PAN: AAACL 2711 N] V/S DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4, AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.83/AHD/2008 (ASSESSMENT YEAR:-2005-06) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4, NAVJIVAN TRUST BLDG., OFF. ASHRAM ROAD, AHMEDABAD V/S LINCOLN PHARMACEUTICALS LTD., 2 ND FLOOR, NIRAV COMPLEX, KHANIJ BHAVAN, NR. NAVRANGPURA HIGH SCHOOL, NARANPURA, AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI A C SHAH, AR REVENUE BY:- SHRI K M MAHESH, DR O R D E R A N PAHUJA: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVEN UE DIRECTED AGAINST AN ORDER DATED 22-10-2007 OF THE L D. CIT(APPEALS)- VIII, AHMEDABAD , RAISE THE FOLLOWING GROUNDS:- ITA NO.4374/AHD/2007[ASSESSEE ] : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) ERRED IN NOT ACCEPTING THE ASSESSEES CONTENTION THAT IT WAS ENTITLED TO DEDUCTION U/S 80IB ON PROFIT DERIVED IN A SUM OF RS .43,36,000/- ON THE GOODS WHICH IT GOT MANUFACTURED BY LOAN LICENCEES U NDER ITS OWN CONTROL AND SUPERVISION ETC. 2. WITHOUT PREJUDICE, ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, THE CIT(A) ERRED IN DENYING THE AFORESAID BENEFIT T O THE ASSESSEE BY ARGUING THAT THOSE GOODS WERE MANUFACTURED BY THIR D PARTIES UNDER ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 2 SUPERVISION AND CONTROL OF APPELLANT BUT NOT IN THE PREMISES OF THE APPELLANT. HE FAILED TO REALIZE THAT BENEFIT CANNO T BE DENIED ONLY BECAUSE THE MANUFACTURING PROCESS DOES NOT TAKE PLA CE IN THE PREMISES OF THE ASSESSEE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN NOT ACCEPTING THE ASSESSEES PLEA THAT IT WAS NOT A T ALL A FIT CASE FOR LEVY OF INTEREST U/S 234A, 234B AND 234C OF THE I.T. ACT . AT ANY RATE, INTEREST U/S 234B WAS CERTAINLY NOT LEVIABLE. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR WITHDRAW ANY GROUND OR GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF HEARING OF THE APPEAL. ITA NO.83/AHD/2008[REVENUE] 1. THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE AO NOT TO EXCLUDE PROFIT ON CONTRACT WORK OF RS.6,9 0,693/- AND INTEREST INCOME OF RS.14,09,265/- FROM THE COMPUTATION OF DE DUCTION U/S 80IB. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE L D. CIT(A) MAY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EFF ECT . 2 AT THE OUTSET, THE LEARNED AR ON BEHALF OF THE AS SESSEE SOUGHT PERMISSION TO WITHDRAW THE APPEAL FILED BY THE ASSE SSEE. THE LEARNED DR DID NOT RAISE ANY OBJECTION TO THE REQUE ST OF THE LEARNED AR. THEREFORE, APPEAL FILED BY THE ASSESSEE IN ITA NO.4374/AHD/2007 IS DISMISSED. 3 ADVERTING NOW TO GROUND NO.1 IN THE APPEAL OF THE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT R ETURN DECLARING INCOME OF RS.1,47,89,251/- FILED ON 25-01-2006 BY T HE ASSESSEE, MANUFACTURING PHARMACEUTICALS, AFTER BEING PROCESSE D U/S 143(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO A S THE ACT], WAS SELECTED FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 03-10-2006. DURING THE COURSE OF ASSESSMENT PROCEED INGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASS ESSEE CLAIMED ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 3 DEDUCTION U/S 80IB OF THE ACT OF AN AMOUNT OF RS.6, 90,693/- ON ACCOUNT OF PROFIT FROM JOB WORK RECEIPTS BESIDES IN TEREST OF RS.14,09,265/-. SINCE THE SAID INCOME WAS NOT DERIV ED FROM THE ACTIVITIES OF INDUSTRIAL UNDERTAKING, RELYING UPON THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF HINDUSTAN LEVE R LTD. VS. CIT, 239 ITR 297 AND PANDIAN CHEMICALS LTD. VS. CIT, 262 ITR 278 , THE AO DISALLOWED THE CLAIM FOR DEDUCTION U/S 80IB OF T HE ACT ON THE AFORESAID INTEREST INCOME OF RS.14,09,265/- AND PRO FIT OF RS.6,90,693/- FROM JOB WORK RECEIPTS OF 1,27,19, 936/-. 4. ON APPEAL, THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE IN THE FOLLOWING TERMS:- 2.4 I HAVE CONSIDERED THE SUBMISSIONS OF THE LEARNE D COUNSEL FOR THE APPELLANT. . WITH REGARD TO CLAIM OF THE APPEL LANT FOR DEDUCTION U/S 80IB ON JOB WORK INCOME, IT IS OBSERVED THAT TH E APPELLANT HAS EARNED PROFIT OF RS.6,90,693 FROM CARRYING OUT MANUFACTURI NG ACTIVITY IN ITS INDUSTRIAL UNDERTAKING ON BEHALF OF OTHER PARTIES. THE CASE OF APPELLANT IS COVERED BY DECISION OF AHMEDABAD TRIBUNAL IN CASE O F ACIT YS. KUNAL PRINTERS LIMITED 2 SOT 414 WHEREBY TRIBUNAL AFTER C ONSIDERING GUJARAT HIGH COURT DECISION HAS HELD AS UNDER: '.... WITH REGARD TO INCOME FROM THE JOB WORK, IT W AS FOUND THAT ASSESSEE HAD EARNED LABOUR INCOME OF RS.4,80,0 00 FROM PRINTING OF SHARE APPLICATION FORMS OF S WHEREIN TH E PAPERS WERE SUPPLIED BY THE PARTIES. MISCELLANEOUS INCOME OF RS.95,900 WAS AN INCOME FROM SALE OF PAPER SCRAP MA DE OUT FROM PRINTING. IN DY CIT. VS. HARJIVANDAS JUTHABHAI ZAVERI 258 ITR 785 (GUJ), IT HAS BEEN CATEGORICALLY OBSERVED B Y THE JURISDICTIONAL HIGH COURT THAT IF THE ASSESSEE WAS NOT ENGAGED IN THE INDUSTRIAL ACTIVITY, THERE WAS NO QUESTION O F EMPTY BARRELS OR SCRAP. INSTEAD OF MANUFACTURING, IF THE ASSESSEE WAS DOING THE TRADING ACTIVITIES, DEALING IN RAW MATERI AL AND IF THE ASSESSEE HAD SOLD THE MATERIAL ON RETAIL BASIS AND EARNED AMOUNT BY SALE OF BARDANS THEN OBVIOUSLY SECTION 80 IA WOULD NOT APPLY. IT WAS ALSO MADE CLEAR THAT AMOUNT RECEI VED TOWARDS JOB WORK AND SALE OF EMPTY ASH BARDANS, EMP TY BARRELS AND PLASTIC WASTES QUALIFIED FOR DEDUCTION U/S 801. FOLLOWING THE SAID JUDGMENT OF HIGH COURT, IT WAS T O BE HELD THAT IN THE INSTANCE CASE, THAT THE INCOME FROM JOB WORK AND SALE OF SCRAP WAS, ELIGIBLE FOR DEDUCTION U/S 80I. ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 4 RESPECTFULLY FOLLOWING THE AFORESAID JURISDICTIONAL DECISION, THE A.O IS DIRECTED TO ALLOW DEDUCTION U/S 80IB ON PROFIT FROM CONTRACT ACTIVITY FOR RS.6,90,693. WITH REGARD TO CLAIM OF THE APPELLANT FOR DEDUCTION U/S 80IB ON INTEREST INCOME, IT IS OBSERVED THAT WHILE PASSING THE ORDER U/S 143(3) OF THE ACT, THE ASSESSING OFFICER HAS CONSIDERED BOTH, INTEREST INCOME AND INTEREST EXPENDITURE AS INCOME FROM BUSINESS & PROFESSION. I T IS NOT THE CASE OF THE ASSESSING-OFFICER THAT INTEREST INCOME IS INCOME FR OM OTHER SOURCES WHICH IS COVERED U/S 56 OF THE ACT. ONCE THE BUSINESS INC OME HAS BEEN DETERMINED BY APPLYING ACCOUNTING STANDARDS AS WELL AS THE PROVISIONS CONTAINED IN THE ACT, THE APPELLANT WOULD BE PERMIT TED IN TERMS OF SECTION 37 OF THE ACT TO CLAIM, AS DEDUCTION FOR EXPENDITUR E, LAID DOWN FOR THE PURPOSE OF EARNING SUCH BUSINESS INCOME. AS THE ENT IRE INTEREST INCOME HAS BEEN CONSIDERED AS BUSINESS INCOME, IN CASE OF THE APPELLANT, INTEREST EXPENDITURE IS REQUIRED TO BE REDUCED FROM SUCH INC OME. SIMILAR VIEW HAS BEEN EXPRESSED BY ORISSA HIGH COURT IN CASE OF TATA SPONGE LIMITED VS. CIT 292 ITR 175. THE A.O. IS DIRECTED NOT TO EXCLUD E INTEREST INCOME OF RS.14,09,265 FROM ELIGIBLE PROFIT. HENCE, THIS GROU ND OF APPEAL IS PARTLY ALLOWED. 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR WHIL E RELYING UPON THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE C ASE OF HINDUSTAN LEVER LTD. VS. CIT, 239 ITR 297 AND PANDIAN CHEMICA LS LTD. VS. CIT, 262 ITR 278 (SC), CONTENDED THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN ALLOWING THE CLAIM OF DEDUCTION U/S 80 IB ON THE INTEREST INCOME AND JOB WORK INCOME. ON THE OTHER HAND, THE LEARNED AR ON BEHALF OF THE ASSESSEE CONTENDED THAT THE JOB WORK INCOME WAS DERIVED FROM THE ACTIVITIES OF THE INDUSTRIAL UNDER TAKING ALONE. AS REGARDS THE INTEREST, THE LEANED AR SUBMITTED THAT THE AMOUNT OF RS. 13,274/- WAS RECOVERED FROM CUSTOMERS FOR LATE PAYMENT OF DUES AND IS THUS, ELIGIBLE FOR DEDUCTION U/S 80IB O F THE ACT IN VIEW OF DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF NIRMA INDUSTRIES VS. DCIT 283 ITR 402. AS REGARDS I NTEREST OF RS.5,22,233/- , THE LD. AR REITERATED THEIR CONTENT IONS BEFORE THE LD. ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 5 CIT(A). FOR THE REMAINING AMOUNTS, THE LD. AR DID N OT MAKE ANY SUBMISSIONS. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY, THE AMOUNT OF RS.6,90,693/- ON ACCOUNT OF JOB WORK INCOME WAS DERIVED FROM THE ACTIVITIES OF INDUSTRIAL UNDERTAKING. IN TERMS OF PROVISIONS OF SECTION 80- IB OF THE ACT, ONLY REQUIREMENT FOR ITS APPLICABILITY IS DERIVING OF IN COME FROM BUSINESS REFERRED TO IN SUB-SECTIONS (3) TO (11), (11A) AND (11B) OF THE AC T, APART FROM OTHER CONDITIONS, WITH WHICH WE ARE NOT CONCERNED. IT IS NOT THE CASE OF THE REVENUE THAT THE BUSINESS OF THE ASSESSEE DOES NOT FALL UNDER SUB-SE CTIONS (3) TO (11), (11A) OR (11B) OF THE ACT. THE ACTIVITY OF THE ASSESSEE IS L IABLE TO BE REGARDED AS MANUFACTURING ACTIVITY IRRESPECTIVE OF THE FACT WHE THER THE PRODUCTS MANUFACTURED THEREIN ARE FOR ITS OWN BUSINESS OR FOR OTHERS ON JOB WORK BASIS. EVIDENTLY, SEC. 80IB OF THE ACT DOES NOT DISTINGUISH BETWEEN THE A CTIVITY INVOLVING MANUFACTURING ON OWN ACCOUNT OR FOR OTHERS. HONBLE JURISDICTIO NAL HIGH COURT IN CIT VS. J.B. KHARWAR & SONS , 163 ITR 394 (GUJ) WHILE HOLDING THIS VIEW ,ALLOWED THE CLAIM FOR DEDUCTION U/S 80J OF THE ACT. HONBLE DELHI HIG H COURT IN CIT V. NORTHERN AROMATICS LTD. [2005] 196 CTR (DELHI) 479 ,FOLLOWIN G THEIR EARLIER DECISION IN NU- LOOK (P) LTD. VS. CIT, 157 ITR 253 (DEL) HELD THAT THE MANUFACTURING ACTIVITY, WHICH RESULTED IN RECEIPT OF SUCH CHARGES, NOT DONE BY THE ASSESSEE FOR ITSELF BUT FOR OTHERS, IS ENTITLED TO DEDUCTION U/S 80IA OF TH E ACT. SIMILAR VIEW WERE TAKEN BY THE HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. IMPEL FORGE & ALLIED INDUSTRIES LTD.,183 TAXMAN 38 . IN THE LIGHT OF THE VIEW TAKEN IN THESE DECISIONS, WE HAVE NO HESITATION IN UPHOLDING THE F INDINGS OF THE LEARNED CIT(A) IN ALLOWING THE DEDUCTION U/S 80IB O F THE ACT ON THE INCOME FROM JOB WORK RECEIPTS. THEREFORE, GROUND NO . 1 IN RESPECT DEDUCTION U/S 80IB ON PROFITS FROM CONTRACT WORK IS DISMISSED. 7. AS REGARDS DEDUCTION U/S 80IB ON THE AMOUNT OF I NTEREST, THERE IS NO DISCUSSION ON THE NATURE OF INTEREST IN THE A SSESSMENT ORDER NOR THE LD. CIT(A) RECORDED ANY FINDINGS ON THIS A SPECT IN THE ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 6 IMPUGNED ORDER. THE LD. CIT(A) ALLOWED THE CLAIM FO R DEDUCTION U/S 80IB OF THE ACT ON THE ENTIRE AMOUNT OF INTEREST OF RS.14,09,265/- ONLY ON THE GROUND THAT INTEREST EXPENDITURE HAS T O BE REDUCED, WITHOUT EVEN REFERRING TO ANY MATERIAL ESTABLISHING NEXUS OF THE EXPENDITURE WITH THE AFORESAID INTEREST INCOME. TH ERE IS NO MATERIAL BEFORE US ESTABLISHING NEXUS OF ANY EXPENDITURE ON ACCOUNT OF INTEREST WITH THE AFORESAID INTEREST INCOME.IN ANY CASE BREAK UP OF AMOUNT OF INTEREST INCOME IS GIVEN IN PARA 2.3 OF THE IMPUGNED ORDER APART FROM ASSESSEES SUBMISSIONS. THE LD. D R APPEARING BEFORE US DID NOT DISPUTE THE NATURE OF INTEREST A S MENTIONED IN THE IMPUGNED ORDER. THEREFORE, WE PROCEED ON THAT BASIS . 7.1 AS REGARDS DEDUCTION U/S 80IB OF THE ACT ON T HE INTEREST RECOVERED FROM THE DEBTORS ON ACCOUNT OF DELAYED PA YMENTS, THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF NI RMA INDUSTRIES VS. DCIT 283 ITR 402, WHILE ADJUDICATING A SIMILAR ISSU E HELD THAT INTEREST RECEIVED FROM TRADE DEBTORS TOWARDS LATE P AYMENT OF SALES CONSIDERATION IS REQUIRED TO BE INCLUDED IN THE PROFITS OF THE IN DUSTRIAL UNDERTAKING WHILE COMPUTING DEDUCTION UNDER SECTION 80I OF THE ACT . ON A SIMILAR ISSUE IN RELATION TO DEDUCTION U/S 80HH OF THE ACT, HONBLE BOMBAY HI GH COURT IN THE CASE OF CIT VS. BHANSALI ENGINEERING POLYMARS LTD.,306 ITR 194( BOM.) WHILE RELYING UPON THE DECISION OF HONBLE MADRAS HIGH COURT REPORTED IN CIT V. MADRAS MOTORS LTD. [2002] 257 ITR 60 AND THE THIRD MEMBER DECISION REPORTED IN KIRLOSKA R ELECTRODYNE LTD. V. DEPUTY CIT [2004] 271 ITR (AT) 69 (PUNE); [2003] 87 ITD 264 (PUNE) , HELD THAT INTEREST RECEIVED ON DELAYED PAYMENTS FROM SUNDRY D EBTORS COULD BE TREATED AS INCOME DERIVED FROM THE INDUSTR IAL UNDERTAKING AND THUS, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IN TH E LIGHT OF VIEW TAKEN IN THESE DECISIONS, WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE CONCLUSION OF THE LD. CIT(A) IN SO FAR AS DEDUCTION U/S 80IB OF THE ACT ON THE AMO UNT OF RS.13,274/- ON ACCOUNT OF INTEREST TOWARDS DELAYED PAYMENT BY THE CUSTOMER S, IS CONCERNED. ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 7 7.2 REGARDING AMOUNT OF RS. 5,22,233/- ON ACCOUNT OF INTEREST RECOVERED FROM M/S CLARION FOR BILL PURCHASE AND DI SCOUNTING, WE FIND THAT NEITHER THE AO NOR THE LD. CIT(A) RECORD ED ANY SPECIFIC FINDINGS ON THE NATURE OF THIS INTEREST NOR THE LD . AR REFERRED US TO ANY MATERIAL THAT THE SAID AMOUNT HAS ANY NEXUS WIT H THE EXPENDITURE OF RS.60,46,408/- AS CONTENDED BEFORE THE LD. CIT(A). IN THESE CIRCUMSTANCES, ESPECIALLY WHEN THE LD. CI T(A) HAS NOT PASSED A SPEAKING ORDER ON THE CLAIM FOR DEDUCTION U/S 80IB ON THE SAID AMOUNT ,WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE O RDER OF THE LD. CIT(A) AND RESTORE THE ISSUE TO HIS FILE FOR DECIDING THE MATTER AFRE SH IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID OBSERVATIONS, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE APPEAL, THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT., BRINGING OUT CLEARLY THE N ATURE OF AMOUNT OF INTEREST AND NEXUS OF ANY EXPENDITURE INCURRED IN EARNING THE S AID INCOME. 7.3 AS REGARDS CLAIM FOR DEDUCTION U/S 80IB ON TH E INTEREST ON FDRS, INTEREST ON FROM THE RECURRING ACCOUNT OR OTH ER INTEREST, THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE ANY S UBMISSIONS. AS IS APPARENT FROM THE IMPUGNED ORDERS, THE AO DI SALLOWED THE CLAIM FOR DEDUCTION U/S 80IB OF THE ACT ON THE GROUND THE RE CEIPTS BY WAY OF INTEREST ON FIXED DEPOSITS WITH THE BANK ,INTEREST FROM RECURRI NG ACCOUNT OR OTHER INTEREST WERE NOT DERIVED FROM THE BUSINESS OF THE INDUSTRI AL UNDERTAKING WHILE THE LD. CIT(A) WITHOUT RECORDING ANY FINDINGS ON THIS ASPEC T , PROCEEDED TO NET OFF THE RECEIPTS AND PAYMENTS AND THAT TOO WITHOUT MAKING REFERENCE TO ANY MATERIAL, ESTABLISHING THE NEXUS OF RECEIPTS WITH PAYMENTS A ND WITHOUT AFFORDING ANY OPPORTUNITY TO THE CONCERNED AO. AS REGARDS EXCLUS ION OF INTEREST ON FDRS FROM THE ELIGIBLE PROFITS FOR THE PURPOSE OF DEDUCTION U /S 80IB OF THE ACT, THE LEADING DECISION IS THAT OF THE HON'BLE SUPREME COURT IN TU TICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 WHICH HOLDS THA T INTEREST EARNED ON DEPOSITS PLACED FOR THE PURPOSES OF OBTAINING LOANS FOR BUSI NESS CANNOT BE TREATED AS BUSINESS INCOME BUT ONLY AS INCOME FROM OTHER SOURC ES.. THE DECISION IN ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 8 TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [19 97] 227 ITR 172, WHICH WAS RENDERED IN THE CONTEXT OF SECTIONS 56 AND 57, HAS BEEN FOLLOWED IN CIT V. AUTOKAST LTD. [2001] 248 ITR 110 (SC). LIKEWISE, IN CIT V. DR. V. P. GOPINATHAN [2001] 248 ITR 449 (SC) INTEREST ON FIXED DEPOSITS WAS HELD NOT TO QUALIFY FOR SETTING OFF AGAINST INTEREST ON LOANS BORROWED. THE OTHER DECISIONS ON THE SAME LINES, IN THE CONTEXT OF SECTION 80HHC ARE CIT V. S TERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC). IN THESE DECISIONS, THE HON'BLE SUPREME COURT REITERATED THE NEXUS THEORY AND DECLINED TO TREAT SUCH INTEREST EARNED AS BUSINESS INCOME. THE DECISION OF THE HONBLE MADRAS HIGH COURT IN SOUTH INDIA SHIPPING CORPORATI ON LTD. V. CIT [1999] 240 ITR 24 WAS ALSO RENDERED IN THE CONTEXT OF TREATING CERTA IN RECEIPTS NOT AS BUSINESS INCOME BUT INCOME FROM OTHER SOURCES FOR T HE PURPOSES OF SECTION 56 READ WITH SECTION 57(III) OF THE ACT. IN CASES WHER E THE ASSESSEE IS REQUIRED TO MANDATORILY KEEP MONIES IN FIXED DEPOSIT IN ORDER T O AVAIL OF CREDIT FACILITY, THE ARGUMENT ON BEHALF OF THE ASSESSEE IS THAT BUT FOR SUCH A STIPULATION BY THE BANK THERE WAS NO NEED FOR THE ASSESSEE TO KEEP THE MONE Y IN FIXED DEPOSIT AND THEREFORE, THE INCOME EARNED FROM SUCH FIXED DEPOSI TS BEARS A DIRECT NEXUS TO THE BUSINESS ACTIVITY ITSELF. GIVEN THE REPEATED AFFIRM ATION BY THE HON'BLE SUPREME COURT IN THE VARIOUS CASES, WE ARE OF THE OPINION T HAT INTEREST EARNED FROM THE BANK, DOES NOT HAVE AN IMMEDIATE NEXUS WITH THE BU SINESS OF THE INDUSTRIAL UNDERTAKING AND THEREFORE, CAN NOT BE SAID TO BE D ERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING . 7.31 IN THE CASE OF AHMEDABAD MANUFACTURING AND CALICO PRINTING CO. LTD. VS.CIT,137 ITR 616(GUJ),HONBLE JURISDICTIONAL HIGH COURT HELD WE ARE IN FULL AGREEMENT WITH THE VIEW TAKEN BY TH E BOMBAY HIGH COURT AND TO SOME EXTENT WITH THE VIEW TAKEN BY THE KERALA HIGH COURT. PROFITS AND GAINS CAN BE SAID TO HAVE BEEN ' DERIVED ' FROM AN ACTIVITY C ARRIED ON BY A PERSON ONLY IF THE SAID ACTIVITY IS AN IMMEDIATE AND EFFECTIVE SOURCE OF THE SAID PROFIT OR GAIN. THERE MUST BE A DIRECT NEXUS BETWEEN THE ACTIVITY AND THE EARNING OF THE PROFITS AND GAINS. IN OTHER WORDS, WHAT WE HAVE TO CONSIDER IS THE PROXIMATE SOURCE AND NOT THE SOURCE TO WHICH THE PROFIT OR GAIN MAY IN A REM OTE INDIRECT WAY BE REFERABLE. THE VIEW TO THIS EFFECT OF THE PRIVY COUNCIL IN CIT V. KAMAKHYA NARAYAN SINGH [1948] 16 ITR 325 WAS APPROVED BY THE SUPREME COURT IN MRS. BACHA F. GUZDAR V. CIT [1955] 27 ITR 1 AND FOLLOWED BY THE KERALA HIGH COURT IN COCHIN CO MPANY ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 9 V. CIT [1978] 114 ITR 822 AND BY THE BOMBAY HIGH COURT IN HINDUSTAN LEVER LT D. V. CIT [1980] 121 ITR 951 . IN OUR OPINION, THE WORD ' DERIVE ' TO BE FOUND I N S. 2(5)(A)(I) OF THE RELEVANT FINANCE ACT WILL HAVE TO BE GIVEN A MEANING CONSISTENT WITH WHAT WAS DECIDED IN THE ABOVE DECISIONS. THE W ORDS 'DERIVED FROM EXPORTS' CANNOT BE ACCEPTED AS EQUIVALENT TO ' REFERABLE TO EXPORTS ' OR EVEN INDIRECTLY OR REMOTELY CONNECTED WITH THE EXPORTS BY A NEBULOUS L INK. 7.32 HONBLE PUNJAB AND HARYANA HIGH COURT IN TH E CASE OF NAHAR EXPORTS VS. CIT,288 ITR 494 UPHELD DISALLOWANCE OF CLAIM FOR DE DUCTION U/S 80IA OF THE ACT ON THE INTEREST INCOME, IN THE LIGHT OF AFORESAID DECISIONS OF THE APEX COURT IN STERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 .. 7.33 FOR THE PURPOSE OF CLAIMING DEDUCTION UNDE R S. 80IB OF THE ACT, THE ASSESSEE IS NOT ONLY REQUIRED TO ESTABLISH THAT IT WAS BUSINESS PROFIT OF THE INDUSTRIAL UNDERTAKING, BUT ALSO TO ESTABLISH THAT THIS WAS A PROFIT 'DERIVED FROM' THE BUSINESS ACTIVITY OF AN INDUSTRIAL UNDERTAKING, WH ICH MEANS A DIRECT NEXUS BETWEEN THE PROFITS AND INDUSTRIAL UNDERTAKING. THE MERE FACT THAT SUCH INCOME WAS A BUSINESS INCOME WOULD NOT ENTITLE THE ASSESSE E FOR DEDUCTION UNDER S. 80- IB OF THE ACT. AS HELD BY THE HONBLE SUPREME COURT IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. V. CIT [1978] 113 ITR 84 , THE PROFITS OR GAINS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB OF THE ACT MUST BE DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS, AND UNLESS THE PROFITS OR GAINS AR E DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS, IT CANNOT BE STATED THAT T HE INTEREST IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WO RDS, THE INDUSTRIAL UNDERTAKING MUST DIRECTLY YIELD THE PROFIT, AND IT CANNOT BE TH E MEANS TO YIELD THE INCOME. THE FACT THAT THE AMOUNT WAS ASSESSED AS BUSINESS INCOM E ITSELF WOULD NOT BE SUFFICIENT TO HOLD THAT THE INTEREST INCOME WAS DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHE R WORDS, IT IS NOT ALL BUSINESS RECEIPTS THAT WOULD QUALIFY FOR THE DEDUCTION AND T HE LEGISLATURE HAS APPARENTLY NOT INTENDED TO GIVE THE BENEFIT OF DEDUCTION TO AL L BUSINESS INCOME. IF THE INTENTION OF THE LEGISLATURE WAS TO GRANT RELIEF TO ALL BUSINESS INCOME, IT COULD HAVE USED THE EXPRESSION, 'PROFITS AND GAINS OF IND USTRIAL UNDERTAKING', THE FACT THAT THE LEGISLATURE HAS USED THE EXPRESSION 'PROFI TS AND GAINS DERIVED FROM THE ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 10 BUSINESS OF INDUSTRIAL UNDERTAKING' HAS SOME SIGNI FICANCE AND IT CONNOTES THAT THE IMMEDIATE AND EFFECTIVE SOURCE OF INCOME ELIGIB LE FOR GRANT OF RELIEF UNDER SECTION 80IB OF THE ACT MUST BE THE INDUSTRIAL UNDE RTAKING ITSELF AND NOT ANY OTHER SOURCE. THE MANDATE OF LAW IS THAT UNLESS THE SOURC E OF THE PROFIT IS THE UNDERTAKING, THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IB OF THE ACT. MERE COMMERCIAL CONNECTION BETWEEN THE INC OME AND THE INDUSTRIAL UNDERTAKING WOULD NOT BE SUFFICIENT. THE DERIVATION OF THE INCOME MUST BE DIRECTLY CONNECTED WITH THE BUSINESS IN THE SENSE THAT THE I NCOME IS GENERATED BY THE BUSINESS. IT WOULD NOT BE SUFFICIENT IF IT IS GENER ATED BY THE EXPLOITATION OF A BUSINESS ASSET. 7.34 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.GASKETS AND RADIATORS DISTRIBUTORS, 296 ITR 440(GUJ) IN THE CON TEXT OF DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF INCOME ON ACCOUNT OF INTEREST ON FIXED DEPOSITS HELD IDENTICAL QUESTION CAME TO BE CONSIDERED BY THE HO N'BLE SUPREME COURT IN PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 AND THE QUESTION, WHICH WAS POSED FOR CONSIDERATION BEFORE THE APEX COURT WAS W HETHER THE INTEREST ON DEPOSITS WITH THE TAMIL NADU ELECTRICITY BOARD SHOU LD BE TREATED AS INCOME DERIVED BY THE INDUSTRIAL UNDERTAKING FOR THE PURPO SE OF SECTION 80HH OR NOT, AND THE HON'BLE SUPREME COURT HAS OBSERVED THAT SECTION 80HH OF THE INCOME-TAX ACT GRANTS DEDUCTION IN RESPECT OF PROFITS AND GAIN S 'DERIVED FROM' AN INDUSTRIAL UNDERTAKING AND THE WORDS 'DERIVED FROM' IN SECTION 80HH OF THE INCOME-TAX ACT, 1961, MUST BE UNDERSTOOD AS SOMETHING WHICH HAS A D IRECT OR IMMEDIATE NEXUS WITH THE ASSESSEE'S INDUSTRIAL UNDERTAKING. THE SUP REME COURT HELD THAT INTEREST DERIVED BY THE INDUSTRIAL UNDERTAKING OF THE ASSESS EE ON DEPOSITS MADE WITH THE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELEC TRICITY FOR RUNNING THE INDUSTRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSELF AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTA KING FOR THE PURPOSE OF THE SAID DEDUCTION UNDER SECTION 80HH. IN G.T.N. TEXTIL ES LTD. V. DY. CIT [2005] 279 ITR 72 , THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FROM EXPORT OF GOODS. THE KERALA HIGH COURT HAS FURTHER HELD THAT THE INTEREST EARNED BY THE ASSESSEE ON FIXED DEPOSITS, COMMISSION RECEIVED ON SALE OF MACHINERY, ETC., WERE NOT BUSINESS INCOME AND CO NSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO COMPUTATION OF ELIGIBLE DEDUCTI ON UNDER SECTION 80HHC OF THE ACT BY INCLUDING THOSE RECEIPTS UNDER BUSINESS INCO ME. THEREFORE, CONSIDERING THE AFORESAID TWO DECISIONS, WE MUST HOLD THAT THE TRIBUNAL AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS), BOTH COMMITTE D AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCOME' AND GRANT ING THE ASSESSEE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT.. ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 11 7.4.. IN THE INSTANT CASE, INDISPUTABLY THERE IS NO MATERIAL BEFORE US THAT INTEREST ON FDRS ,INTEREST FROM RECURRING ACCOUNT OR OTHER INTEREST WERE DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS OF THE INDU STRIAL UNDERTAKING NOR THERE IS ANY EVIDENCE THAT ANY EXPENDITURE WAS ALSO ACTUALL Y INCURRED BY THE ASSESSEE IN EARNING THESE RECEIPTS. IN THESE CIRCUMSTANCES AND IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS BY THE HONBLE APEX COURT A ND JURISDICTIONAL HIGH COURT, WE ARE OF THE OPINION THAT THE AO WAS JUSTIFIED I N DENYING DEDUCTION U/S 80IB ON THESE INCOMES. WE ,THEREFORE ,HAVE NO ALTERNATIVE BUT TO SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THE ORDER O F THE AO,DENYING DEDUCTION U/S 80IB ON THESE RECEIPTS . THEREFORE, GROUND NO.1 IN THE APPEAL OF THE REVENUE SO FAR AS THESE RECEIPTS ARE CONCERNED, IS ALLOWED. 8.. GROUND NOS. 2 & 3 IN THE APPEAL OF THE REVENU E BEING PRAYER AND GENERAL IN NATURE, DO NOT CALL FOR ANY SEPARATE ADJUDICATION AND ARE, THEREFORE, DISMISSED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS D ISMISSED WHILE THAT OF THE REVENUE IS ALLOWED, BUT PARTLY FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 7-10-2010 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 7-10-2010 COPY OF THE ORDER FORWARDED TO: 1. LINCOLN PHARMACEUTICALS LTD., 2 ND FLOOR, NIRAV COMPLEX, KHANIJ BHAVAN, NR. NAVRANGPURA HIGH SCHOOL, NARANPU RA, AHMEDABAD 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4, AHMEDABAD 3. CIT CONCERNED ITA NO.4374/AHD/07 ITA NO.8 3/AHD/2008 12 4. CIT(A)-VIII, AHMEDABAD 5. THE DR, BENCH-C, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD
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