2015 (2) TMI 506

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....ies, we admit the appeals on the following questions framed. In the assessee's appeal, the question for adjudication is as follows: "Whether on the facts and circumstances of the case and in law, the Tribunal erred in holding that the "interest income" earned by the Appellant/Petitioner cannot be said to be "derived by" the eligible undertaking/units as required for claiming deduction under sub-section (2) of section 80IC of the Act,1961? In the revenue's appeal, the question for adjudication is as follows: "Whether on the facts and circumstances of the case, the Tribunal has erred in allowing deduction of Rs. 87.05 lakhs on account of scraps sale T&M Fee under Section 80IC of the I.T.Act, by disregarding the intention of the Parliament in using the expression "derived by" which has narrower connotation in comparison to the phrase "Attributable To" used in the other provision of the Income Tax Act?" The appeals are taken up for hearing and we have heard the submissions made on behalf of the respective parties. With regard to the questions formulated, the issue is interpretation of the word "derived" as used in Section 80-IC of the Income Tax Act, 1961. On the questi....

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....rived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned". Mr. Rao, however, submitted a Special Leave Petition preferred against this decision before the Supreme Court had been admitted along with connected matter, to be registered as C.C.No. 20502-2013. The Karnataka High Court in Motorola's case, inter alia, held in paragraph-8 therein as under: "In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another position of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now, the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the bus....

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....tted the interpretation of the word "derived" had been repeatedly made by the Supreme Court as followed by several High Courts. He relied on Pandian Chemicals Ltd. vs. CIT : 262 ITR 278 (SC), CIT-I vs. Globe Organics Ltd. :Laws (APH)-2014-12-I (ITA No.254 of 2003, decided on 2nd December, 2014), Pyne Packaging Pvt. Ltd. vs. CIT : 356 ITR 222 (Del) and Fenner (India) Ltd. vs. CIT: 241 ITR 803 (Mad). In Pandian Chemicals Ltd. the Hon'ble Supreme Court while interpreting the word 'derived', had held, inter alia, as under: 5. The High Court rejected the submission of the appellant by relying upon the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. V. CIT [1978] 113 ITR 84, where this Court had clearly stated that the expression "derived from" had a narrower connotation than the expression 'attributable to': "... In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in section 80J. In our view, since the expression of wider import, namely 'attributable to'....

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....n the present case means manufacture or production of article or thing. Manufacture or production of article or thing should be the direct and proximate cause of the said receipt and not the indirect causation and reason for the said income. Mere second/third connection is not sufficient; the manufacture /production should be the causa causaus. The expression "derived from" is a narrower expression than the words "attributable to" which includes direct as well as indirect receipts which may not have immediate or direct nexus with the specified activity. In the present case, in view of words "derived from", we have to look at the immediate source which has generated or resulted in the said receipt/income. The immediate source will be the first degree source and not the second or the third degree source, which is a step removed from the specified activity (see Pandian Chemicals versus CIT, (2003) 262 ITR 278 (SC) and Liberty India versus CIT, (2009) 317 ITR 218 (SC) " In Fenner (India) Ltd. the High Court of Madras, held, inter alia, - "14. The other part of the question is relatable to the interest earned by the industrial undertaking. This sort of a question arose for considerat....