2004 (10) TMI 588 - AAR - Income Tax

Interest and Miscellaneous Income Deductions Excluded from Section 80-I due to Lack of Direct Nexus with Industrial Undertaking.

National Fertilizers Ltd., In re

The Authority ruled that interest earned on deposits and certain other incomes do not qualify for deduction u/s 80-I due to lack of direct nexus with the ... Deduction u/s 80-I for interest earned on deposits - incomes from profits - Exclusion of expenses allocated by Marketing and Corporate offices - miscellaneous income - Profit and Loss account -Central Government Public Sector Undertaking - manufacturing and marketing of nitrogenous fertilizer - HELD THAT:- It may be noted that section 80-I of the Act is a beneficial provision and the special deduction allowed there under is in addition to the deductions permissible under other provisions of the Act. Since the special deduction is linked to the ‘profits and gains’ of the industrial undertaking, the expression ‘derived from an industrial undertaking’ was sought to be interpreted as anything connected with the undertaking to boost up income/profits and gains of such undertaking by increasing items/quantum of elementary/reducing deductions to avail maximum benefit under the section. It will be useful to notice here that the expression ‘derived from’ was interpreted by the Hon’ble Supreme Court in CIT v. Sterling Foods [1999 (4) TMI 1 - SUPREME COURT]. Thus, interest on deposit with the MP Electricity Board does not qualify for deduction u/s 80-I Marketing and Corporate offices - It is admitted that while preparing the profit and loss accounts for the purpose of claiming exemption u/s 80-I of Act, all income and expenditure as allocated by the corporate office and marketing division though not directly relatable to the Vijaipur unit, were taken into consideration. The transfer of expenditure to Vijaipur unit is said to be on the basis of the installed capacity as per the practice which was being followed. Therefore, the income and expenditure transferred by the corporate office and the marketing office to Vijaipur unit ignoring the fact that for the purpose of claiming the exemption u/s 80-I, it is only income derived from the industrial undertaking that has to be reckoned in computation as such the income and expenditure which are not directly relatable to Vijaipur unit cannot but be ignored. Thus, the expenditure allocated by the corporate office and the marketing division ought to have been excluded from the debit side of the profit and loss accounts for working out the profits of industrial undertaking for the purpose of computing special deduction u/s 80-I. In regard to question No. 1, it was conceded that the said interest income did not qualify for deduction u/s 80-I, it, therefore, follows that the allocation of interest expenditure from corporate office is untenable. Whether the following incomes credited to P&L account of the industrial undertaking and held by the Assessing Officer as not derived from the Industrial Undertaking, for the purpose of working out deduction u/s 80-I, should not be excluded from its profits to the extent of expenses incurred for earning these incomes and debited to Profit and Loss account - We conclude that these items of income cannot be said to be ‘derived from’ Vijaipur unit, therefore, they ought to be excluded. Item No. 5 is income to recovered from the employees as medical charges spent on them over and above their eligibility. Mr. Jain argued that the amount recovered from the employees would go to reduce the amount al ready spent by the industrial undertaking on its employees. Similar argument was put forth in regard to income received by the sale of scrap, which is item (6). Ms. Shumana fairly submitted that if the applicant could satisfy the concerned Assessing Officer (AO) by showing corresponding entries in the books of account of medical charges spent on the employees and the amounts spent on goods of which the scrap under consideration was sold, such items would not be excluded. Miscellaneous income detailed in column 8 of the applications will abide the result of reconsideration by the Assessing Officer of each item. It should be excluded. Issues Involved:1. Deduction u/s 80-I for interest earned on deposits.2. Exclusion of expenses allocated by Marketing and Corporate offices for deduction u/s 80-I.3. Exclusion of certain incomes from profits for deduction u/s 80-I.4. Deduction u/s 80-I on miscellaneous income.Summary:Issue 1: Deduction u/s 80-I for interest earned on depositsThe applicant sought to determine whether interest earned on deposits with the MP Electricity Board qualifies for deduction u/s 80-I. The Authority concluded that interest of Rs. 7,22,506 (AAR/532/2001) and Rs. 7,05,191 (AAR/533/2001) does not qualify for deduction u/s 80-I, referencing judgments in Sterling Foods and Pandian Chemicals Ltd. v. CIT.Issue 2: Exclusion of expenses allocated by Marketing and Corporate offices for deduction u/s 80-IThe applicant contended that expenses allocated by Marketing and Corporate offices should be excluded from the debit side of the profit & loss account for computing profits of the industrial undertaking for deduction u/s 80-I. The Authority ruled that the expenses of Rs. 2,76,03,364 and Rs. 12,12,74,426 (corrected to Rs. 11,02,56,561) in AAR/532/2001, and Rs. 2,56,44,186 and Rs. 12,94,59,292 in AAR/533/2001, along with interest expenditure, should be excluded from the debit side of the profit & loss account as both interest income and expenditure are to be excluded for deduction purposes.Issue 3: Exclusion of certain incomes from profits for deduction u/s 80-IThe applicant questioned whether certain incomes credited to the P&L account should be excluded from profits for deduction u/s 80-I. The Authority ruled that:- Interest on bank deposits (Rs. 13,30,480) and others (Rs. 57,86,115) should be excluded.- Hire charges of construction equipment (Rs. 3,97,746) and heavy vehicles (Rs. 24,713) should be excluded.- Medical charges (Rs. 2,77,011) and sale of scrap (Rs. 8,39,021) should be reconsidered by the AO.For AAR/533/2001, hire charges of machinery (Rs. 3,80,367) and income from Railway siding (Rs. 7,18,245) should be excluded.Issue 4: Deduction u/s 80-I on miscellaneous incomeThe applicant sought deduction on a further sum of Rs. 51,51,289 (AAR/532/2001) and Rs. 1,21,33,914 (AAR/533/2001) on account of miscellaneous income. The Authority ruled that this will abide by the result of reconsideration by the AO of each item, as represented by Ms. Shumana, DCIT.Conclusion:The Authority ruled on each issue, emphasizing the necessity of a direct nexus between the income and the industrial undertaking for deductions u/s 80-I, and mandated reconsideration of certain items by the AO.