2020 (1) TMI 133 - HC - Income Tax

Court classifies interest income as 'business income' for deduction claim under Section 80IC

Pr. Commissioner of Income Tax-I Ludhiana Versus M/s Vardhman Yarns & Threads Ltd (Vice-Versa) And Pr. Commissioner of Income Tax-I, Ludhiana Versus M/s VTL Investment Ltd. (Formerly Known as Vardhman Threads Ltd.)

The court ruled in favor of the Assessee, upholding the classification of interest income as 'business income' and allowing its inclusion in the deduction ... Interest income received by the assessee on the delayed payments from customers and suppliers - 'Business Income' OR 'Income from Other Sources' - HELD THAT:- Assessee has referred to the judgments of this Court in case titled as Phatela Cotgin Industries Pvt. Ltd. vs. Commissioner of Income Tax [2007 (5) TMI 226 - PUNJAB AND HARYANA HIGH COURT] wherein it was held that in such a case where there is provision in the contract for interest on the delayed payment of outstanding balance, any delayed payment and interest thereon would be constituted as income from business and not income from other sources. Revenue has argued that actually in that case, an appeal could not be carried to the Supreme Court because of lower tax effect. However, he has not been able to cite any judgment to show or give any reason why the proposition laid down by the Bench in that case could not be followed. In the circumstances, we hold question No.1 against the Revenue and in favour of the Assessee. Deduction u/s 80IC - whether process undertaken by the assessee is a manufacturing activity? - metamorphosis of yarn into thread is manufacturing OR process - HELD THAT:- It is not disputed that the yarn which has been used by the Assessee cannot be utilized, for instance for threading purpose. Resultantly, it falls within the definition of manufacturing. Question No.2 is answered against the Revenue and in favour of the Assessee. Issues:- Classification of interest income- Eligibility for deduction under Section 80ICClassification of interest income:The case involved a group of four appeals, with three appeals filed by the Revenue and one by the Assessee. The primary issue revolved around the treatment of interest income earned by the Assessee from a security deposit with the Electricity Board. The Assessing Officer categorized the interest income as 'income from other sources' and disallowed its set off against interest expenditure on a bank loan for business purposes. The Assessee contested this treatment, seeking to classify the income as 'business income' and include it in the deduction claim under Section 80IC of the Income Tax Act, 1961. Despite an unsuccessful appeal before the CIT (A), the Assessee pursued the matter further.Eligibility for deduction under Section 80IC:In the appeal, the Assessee raised questions challenging the ITAT's decision regarding the classification of interest income and the eligibility for deduction under Section 80IC. The Assessee's counsel referred to a relevant judgment to support the contention that delayed payments with interest constituted income from business. The Revenue's argument against the Assessee's manufacturing activity claim was countered by citing a Supreme Court judgment. The court analyzed the process of converting yarn into thread and concluded that it fell within the definition of manufacturing. Consequently, the court ruled in favor of the Assessee on both issues, dismissing the appeals filed by the Revenue.Conclusion:The court's judgment upheld the Assessee's position on the classification of interest income and eligibility for deduction under Section 80IC. The decision highlighted the importance of analyzing the nature of income and the manufacturing process involved. As a result, the appeals filed by the Revenue were dismissed, and the related matters were disposed of accordingly.