ALFA TRANSFORMERS LT V. COMMNR.OF INCOME TAX

ITA/149/2004

AI Insights

The case involves an appeal by the appellant challenging the order of the Income Tax Appellate Tribunal, Cuttack, which reversed the decision of the Commissioner of Income Tax (Appeals), Cuttack. The core issue was the denial of relief under section 80(I) of the Income Tax Act concerning interest income earned from bank deposits used for obtaining letters of credit. The Tribunal had initially agreed with the CIT(A) that the interest was business income but denied the deduction under section 80I, stating there was no direct nexus with the industrial undertaking. The appellant contested this decision, citing precedents that supported their claim. The High Court, referencing decisions from the Delhi and Gujarat High Courts, ruled in favor of the appellant, allowing the deduction.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 768422 (HC-CUTTACK)
• Appeal Type: Others
• Pronouncement Date: 30-04-2019
• Assessment Year: misc
• Other Referred Cases: CIT Vs. Karnal Co-op. Sugar Mills Ltd., Commissioner of Income Tax Vs. Jaypee DSC Ventures Ltd, Commissioner of Income Tax Vs. Shah Alloys Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Bank deposit; Business income; Income Tax; Industrial Undertaking; Interest income; Letter of Credit
• Section: 147; 80-I

Judgement Text

" 05. 03.04.2019 Heard. 2. By way of this appeal, the appellant has challenged the common order dated 30.04.2004 at Annexure-14 passed by learned Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (hereinafter referred to as “the Tribunal”) in ITA 333/CTK/2002 & ITA 334/CTK/2002, whereby the Tribunal has reversed the finding arrived at by the Commissioner of Income Tax (Appeals), Cuttack (hereinafter referred to as “the C.I.T.(A)” ) in the order at Anenxure-10. 3. Learned counsel for the appellant has raised the following questions of law: “(1) Whether, on the facts and in the circumstances of the case, the denial of relief under section 80(I) of the Act by the learned Tribunal is sustainable in the eye of law? (2) Whether, on the facts and in the circumstances of the case, the re-opening of the settled assessment under section 147 of the Act by the Assessing Officer was legally valid?” 4. Learned counsel for the appellant contends that the C.I.T.(A) while considering the matter in paragraph 4 of the order at Annexure-10 has observed as under: “Having considered the above submission made and on perusal of the order of the C.I.T. under section 263 and also relying on the decision of the Supreme Court in the case of CIT Vs. Karnal Co-op. Sugar Mills Ltd. (2000) 243 ITR 2 (SC), I am of the considered opinion that appellant’s making deposits in the bank to open later of credit being a purpose for carrying on the business and incidental to it the interest earned on this deposit cannot be regarded having arisen from any non-business activity and hence relief under Section 80I on such interest is considered allowable as has been done in the original assessment.” I.T.A. No.149 of 2004 -2- However, the Tribunal while considering the appeal filed against the aforesaid order of C.I.T.(A), in paragraphs 11 & 12 of the impugned order dated 30.04.2004 at Annexure-14 has observed as under: “11. In the instant case CIT (A) has allowed the assessee’s claim only on the finding that interest earned on such deposits is income from business. We agree with the ld. CIT (A) that interest earned by the assessee was business income but for claiming deduction in respect of such interest income u/s 80I the assessee has to establish that such income has a direct nexus with the industrial undertaking carried on by him. 12. As per our considered view the interest earned on the bank deposits for obtaining letter of credit can be said to be business income but no deduction u/s 80I is available on such interest income. Such interest income has neither direct nor immediate nexus with the assessee’s industrial undertaking. Even though the case of Tuticorin Alkeli Chemicals (227 ITR 172) is not directly applicable to the assessee’s case but it also does not help the assessee for getting deduction u/s 80I.” Learned counsel for the appellant further contends that the issue is covered by the decision of High Court of Delhi in the case of Commissioner of Income Tax Vs. Jaypee DSC Ventures Ltd, reported in (2011) 335 ITR 0132, and also by the decision of Gujarat High Court in the case of Commissioner of Income Tax Vs. Shah Alloys Ltd., reported in (2017) 396 ITR 0711 (Guj). In the case of Jaypee DSC Ventures Ltd. (supra), it has been held as under: “21. Keeping in view the aforesaid pronouncements in the field, the present controversy is to be adjudged. As is noticeable from the stipulations in the agreement, the performance guarantee by way of bank guarantee was required for faithful performance of its obligations. The non-submission of the -3- guarantee would have entailed in termination of the agreement and NHAI would have been at liberty to appropriate bid security. That apart, the release of such performance security depended upon certain conditions. Thus, it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering the contract and further it was to be kept alive to fulfill the obligations. Quite apart from the above, the release of the same was dependent on the satisfaction of certain conditions. Thus, the present case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest; on the contrary, the amount of interest was earned from fixed deposits which was kept in the bank for furnishing the bank guarantee. It had an inextricable nexus with securing the contract. Therefore, we are disposed to think that the factual matrix is covered by the decisions rendered in Bokaro Steel Ltd. (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Koshika Telecom Ltd. (supra) and, accordingly, we hold that the view expressed by the tribunal cannot be found fault with.” Further, in the case of Shah Alloys Ltd. (supra), it has been held as under: “9. So far as the question raised in Tax Appeal No.187 of 2003 is concerned, the issue is squarely covered by the decision of this Court Tax Appeal No.257 of 2000 with Tax Appeal No.256 of 2000 as well as the decision of the Apex Court in the case of Karnal Co-operative Sugar Mills Ltd (supra). The Apex Court in the case of Karnal Co-operative Sugar Mills Ltd (supra) has observed 2. 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 assesses agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. In this view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT [1997] 227 -4- ITR 172 will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT vs. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). The appeal is dismissed. There will be no order as to costs. 9.1 Similarly the relevant observations made in Tax Appeal No.257 of 2000 by this Court are as under: 13. In the present case, the assessee’s stand has consistently been that due to insistence of the financial institutions, the assessee was compelled to park certain amount in fixed deposits from which it earned interest of 12 per cent, whereas the market rent at the relevant time was higher. Such interest income was utilized for the purpose of assessee’s business by purchasing new machinery. In short, the assessee contended that such income cannot be treated as income from other sources, but must be seen as part of the assessee’s business income. 15. In view of the exercise already undertaken by the Delhi High Court in the case of Jaypee DSC Ventures Ltd (supra), we may not separately refer to in detail the facts and ratio of the various decisions of the Supreme Court, noted above. Suffice it to conclude, in the present case also, the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions. On such funds, the assessee received interest. Such income cannot be treated as income from other sources and must be seen as part of the assessee’s business of manufacturing and selling of chemicals. The decision of the Apex Court in the case of Pandian Chemicals Ltd. (supra) would not be applicable. In the said case, the Apex Court was interpreting the phrase ‘derived from’ used in section 80HH of the Act. It was in this background that the Apex Court held that the words ‘derived from’ must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking. It was on that basis that the Apex Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking. -5- 10. Thus, it is clear that the income earned from fixed deposit placed for business purpose cannot be treated as income from other source but must be seen as part of the assesses business income. In the present case also the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions and therefore the income received thereupon cannot be termed to be income from other sources.” 5. Learned counsel for the respondent contends that the view taken by the Tribunal in the impugned order is just and proper. The income which is evident has no nexus with the business. In that view of the matter, the view taken by the Tribunal is required to be upheld. 6. We have admitted the appeal on the question of law no.(1). Taking into consideration the ratio laid down in the case of Jaypee DSC Ventures Ltd. (supra) and Shah Alloys Ltd. (supra) and that nothing has been placed before us to come to a conclusion that the same has been reviewed or overruled, we are of the considered opinion that this appeal deserves to be allowed and, is accordingly allowed. Question of law no.(1) is answered in favour of the assessee. Issue urgent certified copy of this order as per Rules. SKG/SKJ .……..........………… ( K.S. Jhaveri ) Chief Justice ……………….…….. ( K.R. Mohapatra ) Judge "