TaxTMI 
TaxTMI 
2022 (9) TMI 1383
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.... Assistant Commissioner of Income Tax, Circle-I, Vijayawada at that material point of time. For the assessment year 1997-98, the company filed its returns on 27.10.1997 declaring the total income of Rs.23,67,220/-. While filing its return, the assessee claimed deduction of Rs.2,60,580/- under Section 80(I) of the I.T. Act. The return was taken up for scrutiny under Sections 143(2) and 142(1) of I.T. Act. The assessment was completed on 08.05.1998 by allowing deductions only to an extent of Rs.55,924/-. The reason for restricting the deduction appears to be that the interest paid was not derived from the business of the manufacture and production of the industrial undertaking. (b) Aggrieved by the same, the assessee preferred an appeal to CIT Appeals (IV), Hyderabad bearing ITA No.154/CIT(A)/VJA/98-99. The Commissioner of Appeal found that as the interest amount of Rs.14,60,994/- was received from the debtors, on account of delay in payment of sale proceeds, the same cannot be said to have derived from industrial undertaking and accordingly allowed the appeal in part vide Order dated 31.07.2000. The assessee carried the matter in appeal before the Income Tax Appellate Tribu....
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....sactions, and as such, it cannot be said that it was a gain derived from its industrial undertaking. 7. The point that arises for consideration is, whether in the facts and circumstances of the case, the assessee is entitled for deduction under Section 80(I) of the I.T. Act? 8. Section 80(I) of the Income Tax Act, 1961 reads as under:- "80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.-(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft], to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof: Provided that in the case of an assessee, being a company, the provisions of this sub-section [shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel]as if for the words R....
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....(i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section. Provided further that the condition in clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words ―not being any article or thing specified in the list in the Eleventh Schedule had been omitted." 9. The controversy revolves around the word 'derived' and the word 'industrial undertaking'. The question is whether the interest paid on delayed payments form part of profits and gains derived from an industrial undertaking? 10. Section 80HH of the I.T. Act, which deals with deductions in respect of the profits and gains from newly established industrial undertakings or Hotel business in backward areas also contains the phrase "profits and gains derived from an industrial undertaking." The word 'derived' has been construed by the Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) wherein it was....
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....y Electric Supply Industrial Co. vs. CIT reported in (1987) 113 ITR 84 (SC); (2) CIT Madras-I vs. Wheel and Rim Company of India Ltd. reported in (1997) 107 ITR 168 (Mad) and (3) National Organic Chemical Industrial Ltd. vs. Collector of Central Excise, Bombay reported in JT 1997 (1) 637 (SC), the Hon'ble Supreme Court held that source of import entitlements cannot be said to be the industrial undertaking of the assessee. The Court held that the source of import entitlement can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements become available. Therefore, there must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the facts of the said case, it was held that a nexus was not direct, but only incidental. Hence, the benefit was not given. 14. At this stage, it would also be appropriate to refer the judgment of Cambay Electrical case [(1987) 113 ITR 84 (SC)] wherein it was held that: "The expression 'attributable to' was wider in import than the expression 'derived from'. The expression of wider import, namely,....
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....the same has nothing to do with the industrial undertaking or the manufacturing activity of the assessee. On appeal, the Commissioner (Appeals) held that the assessee was entitled to include interest while computing the profits and accordingly granted relief under Section 80(I) of the I.T. Act. On Revenue's appeal, the Tribunal disagreed with the view expressed by the Commissioner (Appeals). Challenging the same, a writ petition came to be filed before the High Court. It would be just and proper to extract the relevant portion of the order, which is as under:- "30. The Tribunal was, therefore, not justified in holding that while computing deduction under Section 80-I of the Act, interest received from trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking." 19. Similar view was taken by the Madras High Court in Madras Motors case [cited 1 supra]. It would be appropriate to extract the relevant portion of the order, which is as under:- "3.2. Let us now consider the interest earned by the as....