Interest on Delayed Payment Qualifies as Income for Deduction under Section 80-IA

Mayank Electro Ltd. Versus Income-Tax Officer.

Mayank Electro Ltd. Versus Income-Tax Officer. - TTJ 071, 612, Issues Involved:
1. Whether the interest received on delayed payment of sale consideration qualifies as 'income derived' from the industrial undertaking for the purposes of deduction u/s 80-IA of the IT Act.

Summary:

Issue 1: Eligibility of Interest on Delayed Payment for Deduction u/s 80-IA

The assessee-company sought stay applications for recovery of demands due to disallowance of deductions claimed u/s 80-IA of the IT Act for interest received on delayed payment of sale price. The AO contended that this interest was not 'income derived' from the industrial undertaking as per statutory provisions, thus not eligible for deduction. The assessee argued that the interest was part of the sale receipts and, therefore, should qualify for the deduction.

The AO relied on Supreme Court decisions in CIT vs. Sterling Foods and Hindustan Lever Ltd. to assert that there must be a direct nexus between the profits and the industrial undertaking. The CIT(A) upheld the AO's decision, emphasizing that the interest had no direct nexus with manufacturing activities and was not derived from them.

The Tribunal considered various case laws, including CIT vs. Govinda Choudhary & Sons and United Construction Contractors vs. CIT, which supported the assessee's claim that interest on delayed payments is part of the trading receipts and should be treated as income derived from the business of the industrial undertaking.

The Tribunal found that the Revenue authorities had adopted a narrow approach. It held that for determining profits and gains 'derived from' any business of an industrial undertaking, the sale proceeds and their realization must be included. The Tribunal concluded that interest on delayed payment is an augmentation of the sale consideration and bears the same character as the sale price. Therefore, it qualifies as 'income derived' from the industrial undertaking for the purposes of deduction u/s 80-IA.

Additionally, the Tribunal noted that if the interest received is to be considered, the net interest (interest received minus interest paid) should be taken into account. The Tribunal allowed the assessee's appeals and deleted the additions made for the assessment years 1995-96 and 1997-98. The stay applications were treated as infructuous and rejected.