Sakthi Footwear vs Assistant Commissioner of Income Tax (No. 1)

Chitra Venkataraman, J.—The appeal is filed by the assessee against the order of the Income Tax Appellate Tribunal, Chennai, made in I. T. A. No. 553/Mds/2005, seeking admission on the following substantial questions of law:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to deduction u/s 80I in respect of duty drawback ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to deduction u/s 80I in respect of interest earned on amounts retained by the bank ?

The appellant-firm is engaged in the business of shoe uppers. For the assessment year 2001-02, the appellant filed its return admitting an income of Rs. 2,40,000. The assessment u/s 143(3) of the Income Tax Act, 1961, was completed on February 16, 2004. While completing the assessment, the Assessing Officer has restricted the claim of deduction u/s 80I by disallowing the claim of duty drawback as well as interest on bank deposit. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-VIII, who confirmed the assessment. The further appeal before the Income Tax Appellate Tribunal resulted in failure. Hence, the present appeal is filed seeking admission by framing the substantial questions of law as stated above.

A perusal of the order of the Tribunal shows that the claim of the assessee was rejected on the ground that the duty entitlement as well as interest on bank deposit do not qualify as "income earned out of industrial activity" to fall under the phrase "derived from" under the head "Business". In the circumstances, the Tribunal referring to the decision of the Supreme Court reported in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, , held that unless and until the income earned is inextricably connected with the industrial undertaking, the question of extending the benefit of deduction u/s 80I does not arise.

As far as the first question is concerned, viz., the deduction u/s 80I in respect of duty drawback, learned Counsel for the appellant placed reliance on the Gujarat High Court decision reported in Commissioner of Income Tax Vs. India Gelatine and Chemicals Ltd., , wherein it was held that duty drawback was "derived from" the industrial undertaking and, therefore, would be eligible for deduction u/s 80J. Learned Counsel for the appellant also pointed out that in the case of duty drawback, the same was given specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. Referring to the decision of the Gujarat High Court that the duty drawback is "derived from" industrial undertaking and eligible for deduction, learned Counsel seeks to draw support of the said decision to contend that the order of the Tribunal holding that the same was not "derived from" industrial activity, could not be held to be the correct view.

It may be seen that dealing with the inclusion of duty drawback for considering the deduction u/s 80HH, this Court in the decision reported in Commissioner of Income Tax Vs. Jameel Leathers and Uppers, , held at page 102 as follows:

The decision of the Karnataka High Court relied on by learned Counsel for the assessee in the case of Sterling Foods Vs. Commissioner of Income Tax, did not examine the distinction between the terms ''derived from'' and ''attributable to''. It only proceeded on the basis, that such income being part of the business income, it must follow that the income is derived from the industrial undertaking.

Referring to the decision reported in National Organic Chemical Industries Ltd. Vs. Collector of Central Excise, Bombay, , the Division Bench held that the Supreme Court held the word "derived" is usually followed by the word "from", and it means : get or trace from a source ; arise from originate in ; show the origin or formation of. The Division Bench also followed the decision of this Court reported in Commissioner of Income Tax Vs. Pandian Chemicals Ltd., .

In the said decision, this Court held that profits or gains eligible for deduction u/s 80HH must be derived from the actual conduct of the business. This Court further held that the mandate of law is that unless the source of the profit is the undertaking the assessee is not eligible to claim deduction u/s 80HH; that mere commercial connection between the income and the industrial undertaking would not be sufficient. This Court held that profits and gains derived from industrial undertaking denotes that the immediate and effective source of income eligible for the grant of relief u/s 80HH must be the industrial undertaking itself and not any other source. The said decision was affirmed by the apex court in the decision reported in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, , wherein the Supreme Court held that the rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing the rule of liberal construction. In the circumstances, the apex court held that the interest derived by the industrial undertaking of the assessee on deposits made with the electricity board for the supply of electricity for running the industrial undertaking could not be said to flow directly from industrial undertaking itself and was not profits and gains derived by the undertaking for the purpose of special deduction u/s 80HH. The apex court held that the words "derived from" in Section 80HH must be understood as something which has a direct or immediate nexus with the industrial undertaking. Having regard to the language of Section 80I, in the face of the decisions of the apex court which were consistently followed by this Court, we do not find any ground to admit the appeal on the first ground, viz., entitlement of the appellant to deduction u/s 80I in respect of duty drawback.

As regards the second question, viz., entitlement of the appellant to deduction u/s 80I in respect of the interest earned on amounts retained by the bank, the learned Counsel for the appellant produced the details regarding the deposits made in the bank to substantiate that they relate to industrial activity. However, deposits do not show that the same is relatable to the interest on the profit by the industrial activity. The deposits admittedly made out of profits are kept in the bank for the convenience of availing of further facilities from the bank. In the background of the same, interest on deposit made would not qualify for deduction u/s 80I. In this connection, this Court, in the decision reported in Dollar Apparels v. ITO [2007] 294 ITR 484 , considered the question as regards the claim of deduction in respect of interest on deposits. This Court again followed the decisions reported in K.S. Subbiah Pillai and Co. (India) Pvt. Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. A.S. Nizar Ahmed and Co., to reject the claim of the assessee that "even assuming that the deposits were made as a pre-condition of the bank for sanctioning the limit, it could not be considered as income from export earnings, as there was no nexus between export earnings and interest income and the interest income was earned from the deposits and not from the export business." Following the principle laid down in the above-mentioned case on the admitted fact that the deposits were made out of profit income for the purpose of availing of further facilities from the bank, we do not find any error in the order of the Tribunal holding that interest income would not qualify for deduction u/s 80I, it being linked for better business prospects and there is no nexus between export earnings and interest income.

In the circumstances, we do not find any ground to admit the appeal. Consequently, the appeal is dismissed.