The Commissioner of Income Tax vs Vidyut Corporation

D.Y. Chandrachud, J.—In the appeal which has been filed by the Revenue u/s 260A of the Income Tax Act, 1961, the following questions of law have been formulated:

1) Whether on the facts and circumstances and in law, the Tribunal was right in upholding the order of CIT(A) directing the AO not to reduce the receipt of interest income by way of bill discounting at Rs. 80,31,351/- and to allow deduction u/s 80IB on the said interest income without appreciating that said income is not "derived from" manufacturing?

2) Whether on the facts and circumstances and in law, the Tribunal was right in upholding the order of CIT(A) that the AO cannot deduct the income under the head "interest" of Rs. 4,36,372/- from the business income for the purposes of computation of deduction u/s 80IB?

The appeal arises out of an order passed by the Tribunal on 15 June, 2009 and it relates to assessment year 2000-01. Each of the two questions would be considered separately.

Question No. 1

The assessee claimed a deduction u/s 80IB. The assessee is engaged in the business of manufacturing electrical fittings and appliances and has a manufacturing plant in the Union Territory of Daman which is an industrially backward area, for the purpose of Section 80IB. The assessee normally sells its manufactured products to M/s. Bajaj Electrical Ltd. on the basis of immediate payment for goods delivered. If the payment is not made immediately, a promissory note is drawn by the purchaser for the amount of discounting charges as agreed from time to time. The promissory note drawn by the purchaser is discounted by the assessee with its Bankers and the bank deducts its discounting charges. The assessee is reimbursed by the purchaser by payment of interest. The Assessing Officer held that the interest received cannot be regarded as being derived from the industrial undertaking for the purpose of Section 80IB. The Commissioner (Appeals), following the unreported judgment of the Gujarat High Court in Mayank Electro Ltd. v. ITO held that the profits of business of the assessee could not be reduced to the extent of the interest received for determining the extent of deduction u/s 80IB. The view of the Commissioner (Appeals) has been confirmed by the Tribunal.

Under Sub-section (1) of Section 80IB where the gross total income of an assessee includes any profits and gains derived from the eligible business, there shall, in accordance with and subject to the provisions of the Section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains to the extent and for the assessment years as specified in the Section. For the purpose of the provision, what needs to be emphasised is that profits must be derived from the eligible business. As construed by the Supreme Court in Liberty India Vs. Commissioner of Income Tax, , the expression "derived from" is narrower as compared to the words "attributable to" and Parliament intended to cover sources not beyond the first degree.

In the present case, the explanation which was furnished by the assessee to the Assessing Officer has been adverted to in the order passed on 28 November, 2006 u/s 143(3) read with 147. The correctness and veracity of the explanation has not been doubted, either in the proceeding before the authorities or before this Court. The facts, as admitted before the Court, would demonstrate that in substance and in essence, what is received by the assessee from the purchaser is a component of interest towards delayed payment of the price of the goods sold, supplied and delivered by the assessee. There can be no dispute about the position that the price realised by the assessee from the sale of goods manufactured by the industrial undertaking constitutes a component of the profits and gains derived from the eligible business. The purchaser, on account of the delay in payment of the sale price also pays to the assessee interest. This forms a component of the sale price and is paid towards the lag which has occurred in the payment of the price of the goods sold by the assessee. On these facts, therefore, the payment of interest on account of the delay in payment of the sale price of the goods supplied by the undertaking partakes of the same nature and character as the sale consideration. The delayed payment charges consequently satisfy, together with the sale price, the first degree test which has been laid down by the Supreme Court in Liberty India. For these reasons, the first question of law, is answered against the Revenue and in favour of the assessee.

Question No. 2

The second question relates to the interest that was realised by the assessee on the amount of Rs. 4,36,372/- during the course of the assessment year on account of unsecured loans advanced by the assessee. The Assessing Officer held that the interest received cannot be held to constitute profits and gains derived from the industrial undertaking. The assessee was found to have parked surplus funds with a specific aim of earning interest thereon and it was consequently held that the interest received as such, had no direct link with the profits and gains derived from the industrial undertaking. The Commissioner (Appeals), however, held that the interest income of Rs. 4,36,372/- cannot be reduced from the business income while computing the income u/s 80IB. What weighed with the Commissioner (Appeals) is that the loans/advances had not been given by the assessee out of interest free capital and that against a receipt of Rs. 4.36 lakhs on account of interest, the assessee had paid interest of Rs. 29.64 lakhs on borrowed funds. Neither of these circumstances which weighed with the Commissioner (Appeals) are of any relevance to whether interest received on unsecured loans could be regarded as being derived from industrial undertaking so as to form a part of profits and gains of the eligible business. Consequently, the interest received by the assessee on unsecured loans cannot be regarded as being derived from the industrial undertaking and would fail to meet the first degree test laid down by the Supreme Court in Liberty India. The Commissioner (Appeals) was, therefore, manifestly in error in holding that the interest received on unsecured loans could not be reduced from the business income for the purposes of computing deduction u/s 80IB. The Tribunal has not furnished any independent reasons based on interpretation of Section 80IB, for confirming the view of the Commissioner (Appeals). For all these reasons, the second question of law, as framed would have to be answered in favour of the Revenue and against the assessee.

We make it clear that we have held that for the purpose of deduction u/s 80IB, the interest income received on unsecured loans does not form a part of the business income.

The appeal is accordingly allowed on the aforesaid question. In the circumstances of the case, there shall be no order as to costs.