2015 (2) TMI 811 - HC - Income Tax

High Court affirms Tribunal's decision on deduction eligibility, emphasizing direct nexus for exemption

International Components India Ltd. Versus The Assistant Commissioner of Income Tax

The High Court upheld the Tribunal's decision in favor of the Revenue, dismissing the appeal. The Tribunal's rectification under Section 154 to reduce the ... Rectification of mistake - intimation under Section 143(1) rectified - whether question of admissibility of deduction of interest income under Section 10B of the Act is a mistake apparent from the face of the record and hence the intimation under Section 153(1) can be rectified in a proceeding under Section 154 - Held that:- The interest earned from deposits with Corporation Bank, Electricity Board and on Staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and consequently, they are not eligible for grant of deduction under Section 10B of the Act, which is akin to Section 80HH of the Act The order passed by the Assessing Officer under Section 154 of the Act is valid in the eye of law and the same has been rightly upheld by the Tribunal, as the true intent behind passing such a rectification order is to ensure that the law laid down by the Supreme Court in Pandian Chemicals case,[2003 (4) TMI 3 - SUPREME Court] is stricto sensu given effect to. - Decided against assessee. Issues:1. Rectification of intimation under Section 143(1) of the Act by resorting to Section 154 of the Act.2. Admissibility of deduction of interest income under Section 10B of the Act.Issue 1: Rectification of Intimation under Section 143(1) of the Act by Resorting to Section 154 of the Act:The appellant, engaged in manufacturing and export, filed its return of income for the assessment year 2000-2001, admitting income of Rs. 25,48,580/-. The Assessing Officer subsequently found interest income of Rs. 11,27,629/- from deposits not related to the business undertaking. The Assessing Officer issued a notice under Section 154 proposing rectification to exclude the interest income from exemption under Section 10B of the Act. The Commissioner of Income Tax (Appeals) accepted the plea of the assessee, but the Tribunal allowed the Revenue's appeal. The Tribunal concluded that since the interest income was not derived from the business undertaking, it was not eligible for exemption under Section 10B. The Tribunal reduced the eligible deduction under Section 10B through Section 154 rectification.Issue 2: Admissibility of Deduction of Interest Income under Section 10B of the Act:The appellant contended that the grant of deduction under Section 10B was a debatable issue beyond the scope of prima facie adjustment under Section 143(1) and thus not suitable for rectification under Section 154. However, the Supreme Court precedent in Pandian Chemicals Ltd. v. Commissioner of Income-tax clarified that profits must have a direct nexus with the industrial undertaking to qualify for exemption. The interest earned from deposits with banks and staff advances did not have a direct nexus with the business undertaking, rendering them ineligible for deduction under Section 10B. The Tribunal's reliance on a decision by the Madras High Court in Southern Industrial Corporation Ltd. v. Commissioner of Income Tax further supported the validity of the rectification order to align with the law laid down by the Supreme Court.In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision in favor of the Revenue. The rectification under Section 154 was deemed valid to ensure compliance with the Supreme Court's interpretation regarding the eligibility of interest income for deduction under Section 10B of the Income Tax Act.