Asian Cement Industries vs Income Tax Appellate Tribunal

Virender Singh, J.—Aggrieved of the order dated 1-11-2006 passed by Income Tax Appellate Tribunal Amritsar Bench (for short 'ITAT'),

M/s. Asian Cement Industries, Industrial Estate, Kathua (for short 'Assessee') is before us in the present two appeals filed u/s 260A of the income

tax Act, 1961 (for short 'IT Act') involving the identical issues on facts and law. The appeals, as such, are taken on board together for

consideration for admission on substantial questions of law. Upon notice, Mr. D.S. Thakur, learned senior Advocate, appears for the Revenue. He

is assisted by Mr. K.D.S. Kotwal, Advocate.

The following questions of law in the memo of appeal describing them as substantial questions of law have been formulated by the Assessee:-

(i) Whether on the facts and in the circumstances of the case, the Income Tax Officer has been right in law in refusing deduction u/s. 80-IB on

interest earned on FDRs made for securing bank limits under business compulsions and not as Investments by choice for earning interest income,

when, interest earned on FDRs pledged for getting bank limits/overdrafts have been assessed under the Head business income.

(ii) Whether on the facts and in the circumstances of the case interest earned on FDRs pledged as security with P.D.D. Department and Sales Tax

Department for securing electric connection and sales tax registration have direct and proximate connection with the business of industrial

undertaking thus eligible for deduction u/s 80-IB of the Act.

(iii) Whether in the facts and circumstances of the case even assuming but not admitting that deduction u/s. 80-IB on interest earned on FDRs

pledged for overdraft is not allowable, whether the Hon'ble Tribunal has erred in law in not allowing netting of interest earned on pledged FDRs

against interest paid in bank overdraft raised for the purpose of business of the appellant as the interest earned and interest debited as expenditure

are the same genesis and only net interest could be assessed as income as liable to tax under the income tax Act.

(iv) Whether in the facts and circumstances of the case the Hon'ble Tribunal is justified in law in holding interest income as not eligible profit for the

purpose of calculation of deduction u/s 80-IB by relying on Hon'ble Supreme Court judgment in the case of Pandian Chemicals Ltd. Vs.

Commissioner of Income Tax, given by Double Bench, by ignoring the Larger Bench judgment of Hon'ble Supreme Court (2000) 244 ITR (St.)

54 whereby the SLP filed by the department against judgment of Hon'ble Bombay High Court in Commissioner of Income Tax Vs. Nagpur

Engineering Co. Ltd., wherein it was held that interest income from fixed deposits is eligible profit of the business for computing deductions u/s

80HH and 80-I was dismissed.

Brief resume of the case of the Assessee.

The controversy relates to the assessment years 2003-2004 and 2004-2005. The assessee claimed deduction u/s 80-IB of I.T. Act by

including interest amounting to Rs. 2,21,845 and Rs. 2,86,486 on FDRs for the aforesaid two assessment years respectively declaring it as income

of an industrial undertaking before Assessing Officer (for short 'A.O.') on the plea that the said FDRs were kept as guarantee with the Electricity

Department and the Banks for securing credit facilities. It was contended that the interest part was part of business income of an Industrial

Undertaking and therefore, eligible for deduction u/s 80-IB. A.O., however, disallowed the deduction and treated it as 'Income from other

sources'. Aggrieved thereof, the Assessee filed two separate appeals before C.I.T(A) reiterating the same stand, but to no relief. Thereafter, two

statutory appeals before ITAT (Amritsar Bench), also faced dismissal.

Hence the present appeals u/s 260-A of I.T. Act.

Heard M/s. Subhash Dutt and Suraj Singh Wazir for the Assessee and Mr. D.S. Thakur, learned Senior Advocate assisted by Mr. K.D.S.

Kotwal, Advocate, for the Revenue. We have gone through the orders of all the three for as below.

Learned counsel for both the sides are in agreement that all the questions of law formulated in the instant appeals are interlinked and the only

controversy involved herein is, 'whether on the facts and circumstances of the present case, the assessee is entitled to deduction u/s 80-IB of IT

Act on interest earned by him on FDRs kept as guarantee with Electricity Department and the Bank for securing bank limits and the referred

thereto is bad in law'. The other issue with regard to not allowing the netting of interest is an ancillary issue.

Mr. Dutt submits that the case of the assessee throughout has been considered u/s 80HH of I.T. Act, which, in fact, has no relevance to the

present controversy (Section 80-IB of I.T. Act), inasmuch as, the phraseology used u/s 80-IB for deduction is different from the phraseology used

u/s 80HH of the Act.

Learned counsel would contend that u/s 80-IB, income derived from 'business of Industrial Undertaking' is eligible for deduction, whereas u/s

80HH of the Act, the deduction could only be given on income derived from 'Industrial Undertaking'. In Section 80HH, expression 'derived from'

is used with a view to give restricted meaning to the income of 'Industrial Undertaking' as against in section 80-IB the expression, 'profits and gains

derived from any business of Industrial Undertaking' is there and this language makes the entire difference. In short, the learned counsel wants to

canvass that words 'any business of Industrial Undertaking' is inserted with an intention to give benefit of deduction u/s 80-IB to income which has

direct nexus with the profits and gains of Industrial Undertaking and even otherwise, the word 'business' is to be construed in wide amplitude so

that it covers any trade or any act in nature of trade.

Mr. Dutt, thus, submits that the interest income derived from FDRs is the income from the business of the Industrial Undertaking, as such,

liable for deduction and that the judgment of Hon'ble Supreme Court in case Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, applied

against the assessee is totally distinguishable on facts from the present case.

In support of his submissions, Mr. Dutt has relied upon a judgment of Delhi High Court in case The Commissioner of Income Tax Vs. Eltek

SGS (P) Ltd., and has in particular referred to para 21 of the judgment.

Learned counsel lastly submitted that even otherwise also the interest earned by the assessee on FDRs is liable to be adjusted against the

interest paid by him on the overdraft facilities obtained from the Bank(s), therefore, the assessee could be taxed only on the differential amount and

not on the entire interest amount, which aspect has also not to be dealt with in accordance with the provisions of the Act.

Mr. Dutt, thus, submits that issues summarized hereinabove, are debatable issues and, as such, substantial questions of law, warranting

consideration.

Per contra, Mr. Thakur, learned Senior Advocate appearing for the Revenue, while supporting the order of ITAT submits that the assessee

has not been able to establish his stand before any forum and bring his case within the ambit of Section 80-IB of I.T. Act so as to avail any

deduction on the interest earned on FDRs, kept either with the Bank or Electricity Department. Losing at all the three platforms in continuity is

enough to dismiss the present appeals.

Mr. Thakur then submits that the reliance placed by Mr. Dutt on Eltek SGS (P.) Ltd.'s case (supra) does not put the assessee in any

advantageous position as the judgment is distinguishable on facts; that in reported case also the view take in Pandian Chemicals Ltd. case (supra),

Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and Commissioner of Income Tax

Vs. Sterling Food, Mangalore, have been reiterated and the case of the assessee is also decided following the said ratio. He, in this regard, refers

to para 23 of Eltek SGS (P.) Ltd.'s case (supra).

Mr. Thakur would contend that in the light of decision handed down in case Commissioner of Income Tax Vs. V.P. Gopinathan, , the interest

paid by the assessee as interest on overdraft facility cannot be set off against the interest received on the FDRs pledged by him with the Bank so as

to avail any deduction under the head 'Income from other sources'. So even that plea is not available to the assessee.

Mr. Thakur thus, submits that no question of law much less substantial question of law arises in this case for consideration of this Court on any

issue, as such, both the appeals merit dismissal.

At the very outset, it will be apposite to refer to the relevant findings recorded by CIT(A) in paras 5, 5.1 & 5.2, which are as under:

I have perused the facts and carefully considered the submissions. The appellant has relied on the judgment of Hon'ble Supreme Court in the

case of Vellore Electric Corpn. (supra). It may be mentioned here that judgment is not relevant, to the present case as it was given in the context of

old section 80-I relating to Priority Industries. Under those provisions exemption was available to the profits or gains 'attributable to' priority

industries. The word used in the section was 'attributable to' and not 'derived from' which is used in the present section. It has been held by the

Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , that the

expression ""derived from"" has a narrower connotation than the expression ""attributable to"". The distinction between ""derived from"" and

attributable to"", has been reiterated by the Supreme Court in its later ruling in the case of Commissioner of Income Tax, Karnataka Vs. Sterling

Foods, Mangalore, . The word ""derived"" has been construed as far back in 1948 by the Privy Council in (1948) 16 ITR 325 (Privy Council) when

it said:

The word 'derived' is not a term of art its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should

stop as soon as the effective source is discovered.

The Hon'ble Supreme Court in Pandian Chemical case referred to this definition and observed that the word ""derived from"" in section 80HH of the

income tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. It

observed that although electricity may be required for the purpose of the industrial undertaking, the deposit required for its supply is a step

removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow

directly from the industrial undertaking itself. Accordingly, the Apex Court held that interest derived by the industrial undertaking of the assessee on

deposits made with the electricity board for supply of running the industrial undertaking itself and was not profits or gains derived from the industrial

undertaking for the purposes of Section 80HH of the Act. The issue is also covered against the appellant by the judgment of the Hon'ble Madras

High Court reported in the case of Commissioner of Income Tax Vs. Viswanathan and Co., .

5.1 It is also argued that the judgment in the case of CIT v. Pandian Chemicals Ltd. (supra) has been given in the context of 80HH where the

words used are 'profits and gains derived from an industrial undertaking' whereas under the provisions of section 80-IB the word used are 'profit

and gains derived from any business referred to sub-sections (3) to (11), It is submitted that by insertion of words, ""from any business of

undertaking"" as against the words 'derived from industrial undertaking' a different meaning has been conveyed the legislature. According to the

assessee, introduction of the word, ""business"" has made material difference and, therefore, the judgment in Pandian case is not applicable. In my

considered view, there is not: much difference between the language used in the two sections because the words 'profits and gain' are always used

in the context of business only and not otherwise. Section 80HH(2)(ii) and (iii) clearly refer to business of industrial undertaking. Further, section

80HH(6) starts as under:

Where any goods held for the purpose of business of the industrial....."" Thus, the distinction based on the word business is without any force as

section 80HH as well as section 80-IB refer to the business of industrial undertaking. The artificial distinction sought to he drawn by the assessee is

further rendered meaningless when we carefully read the language used in sub-section (3) and (4) of section 80-IB which are, in fact, the operative

provisions and quantify the amount of deduction admissible u/s. 80-IB. It is pertinent to reproduce the relevant para of section 80-IB(4) which is

applicable in the appellant's case.

(4) The amount of deduction in the case of an industrial undertaking in any industrially backward State specified in the Eighth Schedule shall be

hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment

year and thereafter twenty five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial

undertaking.

It would be seen from the above that the deduction u/s. 80-IB also, is admissible in respect of profits and gains derived from the industrial

undertaking and not of the business of industrial undertaking.

5.2 Keeping in view the legal position as discussed above and the direct judgment of the Hon'ble Supreme Court in Pandian Chemicals case

(supra), in my considered opinion, the appellant is not eligible for deduction u/s. 80-IB of the Act in respect of interest income. As observed by the

Hon'ble Apex Court, we have to see the immediate source of the income which in the present case is FDRs. As regards deduction u/s. 80-IB, it is

immaterial whether the FDRs were taken under compulsion or otherwise. As regards the other ground that the interest income should be allowed

to be set off against the interest paid in my considered opinion, that is not permissible as per judgment of the Apex Court in the case of CIT v. Dr.

V.P. Gopinathan (supra) since the borrowings have not been made for the purposes of taking the FDRs.

Since Mr. Dutt claims deduction u/s 80-IB of the Act on the premise that the income derived from any business of Industrial Undertaking is

eligible for deduction, whereas deduction u/s. 80HH could only be given of income derived from Industrial Undertaking, it becomes imperative to

have a re-look at the language of both the sections.

Section 80-IB of the Act reads as follows:

80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings

(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-section (3) to (11)

[and (11A)] (such business being hereinafter referred, to as the eligible business), 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 such

percentage and for such number of assessment years as specified in this section.

Section 80HH of the Act reads as follows:

80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas-

(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel 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

the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.

No doubt, both the sections apparently make out some difference in language as 80HH requires that the profits and gains should be derived

from the Industrial Undertaking whereas Section 80-IB requires that the profit and gains should be derived from any business of industrial

undertaking. But in our view, Section 80-IB(1) is not to be read in isolation and requires conjoint reading with Section 80-IB(4). It reads as

follows:

Section 80-IB(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth

Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the

initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from

such industrial undertaking.

(Emphasis supplied)

A bare look at section 80-IB(4) would reveal that reference made to 'profits and gains derived from such industrial undertakings' and not to

'profit and gains derived from any business of the industrial undertaking'. A conjoint reading of Section 80-IB(1) and 80-IB(4) would reveal that

the expression 'profits and gains derived from any business' is to be read as 'profits and gains derived from the industrial undertaking' and the scope

and ambit of Section 80-IB(1) is not in any manner wider than that of 80-IB(4). A holistic view of Section 80-IB would reveal that what is

intended by the haw Makers to qualify for deduction is 'profits and gains derived from the industrial undertaking'. 'There is, therefore, no reason to

bring within the fold of 'profits and gains derived from industrial undertakings' any income beyond the activities of the industrial undertakings on the

ground that the words 'any business' finds expression in 80-IB(1).

It would not be out of place to mention here that, in case Eltek SGS (P.) Ltd. (supra) relied upon by Mr. Dutt, the Division Bench of Delhi

High Court has observed that Pandian Chemicals Ltd. case (supra) does not lay down any different view from the one taken by Supreme Court in

Sterling Foods' case (supra), in which, reliance has been placed on 'Cambay Electric Supply Industrial Co. Ltd.'s case (supra) where the Supreme

Court drew a distinction between the expression 'derived from' and 'attributable to' the latter being wider in import than the expression derived

from'.

All the aforesaid judgments on the issue have also been relied upon by CIT(A) while dismissing the appeals of the Assessee, which view is

further upheld by ITAT.

Since Mr. Dutt has laid much stress on para 21 of Eltek SGS (P.) Ltd. (supra), to lend support, we, for facility of reference reproduce the

same. It reads:

We are of the opinion that it is not necessary for us to go as far as the Gujarat High Court has done in coming to the conclusion that duty

drawback is profit or gain derived from an industrial undertaking. It is sufficient if we stick to the language used in section 80-IB of the Act and

come to the conclusion that duty drawback is profit or gain derived from the business of an industrial undertaking. The language used in section 80-

IB of the Act is not as the expression ""attributable to"" referred to by the Supreme Court in Sterling Foods (supra) and Cambay Electric (supra) nor

is it as narrow as the expression ""derived from"". The expression ""derived from the business of an industrial undertaking"" is somewhere in between.

In the aforesaid case, the Assessee had claimed deduction on custom duty drawback of Rs. 42,92,725 u/s 80-IB of the Act. The claim was

declined by the AO. Aggrieved thereof, the Assessee filed appeal before CIT(A). The appeal was allowed by CIT(A) holding that Sterling Foods

(supra) was not applicable to the facts of the case. The finding was upheld by ITAT. The Division Bench of Delhi High Court, in appeal, confirmed

the view of the learned Tribunal, observing that the source of the duty drawback is the business of the industrial undertaking which is to

manufacture and export goods out of raw material, that is imported, on which custom duty is paid and the entitlement for duty drawback arose

from section 75(1) of the Custom Act, 1961 and the relevant notification thereto issued by the Central Govt. in that regard.

Dealing with the aforesaid case on its own facts, it is observed by the Division Bench in para 23 as under:--

Learned counsel for the Revenue also drew our attention to Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, . However, on a

reading of the judgment we find that that also deals with section 80HH of the Act and does not lay down any principle different from Sterling

Foods (supra). In fact, in Pandian Chemicals (supra) reliance has been placed on Cambay Electric Supply Industrial Co. Ltd (supra) and the

decision seems to suggest, as we have held above, that the expression ""derived from an industrial undertaking"" is a step removed from ""the

business of the industrial undertaking.

The case on hand is entirely distinguishable on facts as the interest income amounting to Rs. 2,21,845/- and Rs. 2,86,486/- on FDRs for the

aforesaid two Assessment Years respectively declaring it as income from the business of the industrial undertaking, in our view, cannot be said to

be an income flowing from the business activity of industrial Undertaking, thus, cannot be computed for deduction u/s. 80-IB of the Act.

As regards the other ground taken by the Assessee that the interest income should be allowed to set off against the interest paid is also not

available to him as per the judgment of Apex Court in case Dr. V.P. Gopinathan's case (supra) relied upon by Mr. Thakur, learned Sr. Advocate

appearing for the Revenue.

Viewed thus, in our considered opinion, no substantial question of law, arises for our consideration in the appeals on hand. Resultantly, both

the appeals filed by the Assessee are dismissed.