English Electric Co. of India Ltd. vs Commissioner of Income Tax

M.N. Chandurkar, C.J.—The assessee is a public limited company and for the assessment year 1970-71 the company claimed relief u/s 80-I of the income tax Act, 1961 (''the Act''). The company claimed relief at 8 percent on Rs. 60,43,669 while the ITO allowed a deduction of 8 percent only on Rs. 50,02,346. The items held impermissible for the purpose of deduction at 8 percent were (1) profit on sale of assets Rs. 1,09,492, and (2) interest on deposits of Rs. 92,550. The ITO held that these sums did not form a part of the income arising out of a priority industry. The AAC also held that there was no direct correlation between these receipts and the priority industry. The Tribunal in appeal filed by the assessee took the view that the interest on deposits and profit on sale of assets could not be considered as profits arising from manufacturing of articles and that every item of profit in a manufacturing organization would not constitute manufacturing profits. Taking the view that the profit must emanate from the activity of manufacturing the articles the Tribunal found that the two items in question could not be treated as ''manufacturing items''. Arising out of this order of the Tribunal, the following question has been referred to this Court u/s 256(1) of the Act:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on deposits of Rs. 92,556 and profit on sale of assets amounting to Rs. 1,09,492 are not to be included in the profits for computing the deduction u/s 80-I of the income tax Act, 1961?.

The learned counsel appearing on behalf of the revenue has fairly not disputed that insofar as the profit on sale of assets is concerned, the matter would be covered by the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . In that decision, the Supreme Court was dealing with a deduction u/s 80E of the Act which is also worded similar to the provisions of section 80-I. u/s 80E deductions are made permissible from ''profits and gains attributable to the business of generation or distribution of electricity.... u/s 80-I deduction is made permissible in respect of profits and gains attributable to any priority industry. The language of section 80E and section 80-I is identical. The question which fell for consideration before the Supreme Court was whether the balancing charge u/s 41(2) of the Act could be taken into account before computing the deduction at 8 percent and the Supreme Court held that such balancing charge would have to be taken into account before computing the deduction of 8 percent contemplated by section 80E. In our view the same would be the position in a case where deduction is claimed u/s 80-I. Accordingly, the Tribunal was not right in excluding the sum of Its. 1,09,492 for the purpose of computing the deduction at 8 percent u/s 80-I.

Insofar as the amount of interest on deposits amounting to Rs. 92,556 is concerned, the learned counsel appearing on behalf of the assessee has contended that this interest was received from suppliers of raw materials, the State Electricity Board, banks as well as on security deposits with other agencies and these profits must also, therefore, be attributable to ''priority industry''. The learned counsel appearing on behalf of the revenue has, however, contended that insofar as interest from banks is concerned, the receipt will be of a general nature and cannot be specifically attributable to ''priority industry''. With regard to the other items of interest, the learned counsel contended that no details have been given as to the nature of the deposits which yielded interest. Insofar as the interest received from banks is concerned, the question appears to be settled by this Court in Commissioner of Income Tax, Tamil Nadu-V Vs. Universal Radiators P. Ltd., in which this Court has held that where a fixed deposit is kept with the bank as security for borrowing and moneys are borrowed for business, interest from fixed deposit cannot be said to be attributable to the priority industry and the industry is not entitled to relief by way of deduction of 8 percent on this interest. The same principle, in our view will apply where interest is earned on deposits kept even in the normal course by the industry. Such income cannot be said to be attributable to the industry itself. Insofar as the other deposits are concerned, it is obvious that the deposits were in the nature of security deposits for the purpose of contracts by the assessee-company and in case of interest received from supply of raw materials the same was received because the raw materials were not supplied at all and the advance receipts were returned with interest. It has to be noted that section 80-I uses the expression ''attributable to'' which is much wider in import than the expression ''derived from'' as pointed out by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.''s case (supra). When the company has to keep security deposits, such deposits are necessary for the purpose of its business and any interest obtained from such deposits would be clearly attributable to priority industry. Similarly, if there were contracts for supply of raw materials with the suppliers and the suppliers have failed to abide by the contract and return the advance given by the company, such interest will also have direct nexus with the business of the priority industry. We are, there fore, of the view that except interest received from bank deposits from the banks, the other amounts which form a part of Rs. 92,556 will be permissible for the purpose of deduction at 8 percent u/s 80-I. In the view which we have taken, the question referred is answered by holding that the profit on sale of assets amounting to Rs. 1,09,492 and interest received by the assessee excluding interest received on bank deposits, will be included in the profits for computing the deduction u/s 80-I. Our answer to the question referred necessitates an enquiry by the Tribunal as to how much was the amount of interest received from banks and that will have to be excluded from the sum of Rs. 92,556 and the balance will have to be included in the profits for computing the deduction u/s 80-I. The question referred is answered accordingly. Revenue to pay the costs of the assessee. Costs Rs. 500.