2006 (3) TMI 96 - HC - Income Tax

Interest on Overdue Payments Eligible for Deduction under Sections 80HH and 80-I

The High Court of MADRAS upheld the Tribunal's decision allowing a deduction for interest on over dues from trade debtors under sections 80HH and 80-I. ... Claim for relief on interest on overdues from trade debtors under sections 80HH and 80-I. - there can be no doubt that the interest earned on the belated payment would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments for the forgings and then agree to pay the interest on the delayed payments, the said interest would have direct nexus with the business of forgings. The true test would be whether such interest would be available to the assessee otherwise also. - interest being directly relatable only to the amounts receivable by the assessee during the course of its business on account of the sale of forgings, this interest would have to be included as the profits and gains derived from the business of the assessee - Tribunal was right in holding that overdues from trade debtors is eligible for relief under sections 80HH and 80I Issues:- Appeal against disallowance of deduction under sections 80HH and 80-I for interest on over dues from trade debtors.- Interpretation of whether interest on belated payments from trade debtors is directly relatable to the business activity.- Application of settled law on the direct nexus of interest earned to the business activity for determining eligibility for deduction.Analysis:The High Court of MADRAS heard an appeal against the disallowance of a deduction claimed by the assessee company under sections 80HH and 80-I for interest on over dues from trade debtors for the assessment year 1993-94. The Assessing Officer had disallowed the deduction, stating that the interest was not derived from industrial activity. The Appellate Commissioner upheld this decision, but the Appellate Tribunal reversed it, ruling that the trade debtors were derived from the industrial undertaking and thus eligible for the deduction.The Revenue appealed this decision, questioning whether the Tribunal was correct in allowing the deduction for over dues from trade debtors under sections 80HH and 80-I. The court noted that the issue had been settled in a previous case, where it was established that interest earned on belated payments was directly related to the business activity. The court emphasized that if the interest was a result of delayed payments for goods sold by the assessee, it had a direct nexus with the business activity, making it eligible for deduction.Based on the settled legal principle and the precedent case, the court found no error in the Tribunal's decision. The court confirmed that the interest earned on over dues from trade debtors was to be considered as profits and gains derived from the business activity of the assessee. Therefore, the appeal was dismissed as no substantial question of law arose for consideration, and no costs were awarded.