Commissioner of Income Tax vs Kothari Products Ltd.

The following two questions have been referred in this case:

Whether, on the facts and in the circumstances of the case, the hon''ble Income Tax Appellate Tribunal is justified in holding that interest income from investment in banks be treated as income derived from an industrial undertaking and entitled to deduction u/s 80-I of the Act ?

Whether, on the facts and in the circumstances of the case, the hon''ble Income Tax Appellate Tribunal is justified in directing that deduction u/s 80-I should be allowed without deducting the amount of deduction permissible u/s 32AB of the Act ?

Question No. 1

u/s 80-I of the Income Tax Act, 1961, a deduction of 20 per cent, is given from the gross total income of an assessee, if the income includes any profits or gains derived from an industrial undertaking.

Income derived from items other than industrial undertaking, which are mentioned in Section 80-I(1) is not relevant for this case.

In the case before us, the assesses derived certain income (a) which was derived from an industrial'' undertaking, and (b) to which Section 80-I applied by virtue of Sub-section (2) thereof.

That income (or rather part of that income) derived from the industrial undertaking was invested in banks as capital upon which interest was earned by the assessee.

The assessee claimed that this interest should also be treated as income derived from the industrial undertaking and accordingly claimed 20 per cent, deduction permissible u/s 80-I. The department contends otherwise.

The purpose of Section 80-I, as is apparent from Sub-section (2) thereof, is firstly to encourage establishment of new industries by granting the deduction aforesaid. However, a detailed reading of that statutory provision suggests that the idea of granting deduction does not appear to stop upon establishment of the new industry, but the purpose continues also to encourage the production in that new industry and accordingly profits derived from the industrial undertakings qualify for deduction up to a certain period.

In the light of the above purpose, Section 80-I should not be stretched to the limit where income derived from the industrial undertaking is reinvested by the assessee in a non-industrial undertaking for the purpose of earning income from the non-industrial undertaking.

Therefore, on the first impression we would be inclined not to allow deduction of 20 per cent, on the interest earned by the assessee merely because the original nucleus funds which have yielded the interest come from an industrial undertaking.

Learned Counsel for the Income Tax department has placed reliance upon a decision of the Calcutta High Court in the case of INDIAN ALUMINIUM CO. LTD. Vs. COMMISSIONER OF Income Tax, WEST BENGAL-II., which supports the contention of the department and also supports the view expressed by us above.

As against this, learned Counsel for the assessee placed reliance upon a decision of the Nagpur Bench of the Bombay High Court in the case of Commissioner of Income Tax Vs. Nagpur Engineering Co. Ltd., . That decision does not give its own reasoning but merely relies upon another decision in the case of Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd., In Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd., , the question was whether "interest income" is "business income" or not. The question in Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd., was not whether interest income could be said to be "income derived from industrial undertaking". Therefore, the decision in the case of Commissioner of Income Tax Vs. Nagpur Engineering Co. Ltd., , wrongly and mechanically applies the case of Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd.,

Moreover, in the case of Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd., the Bombay High Court was rejecting an application u/s 256(2) and was not deciding any question referred. The Bombay High Court in that case held that no reference was required to be called against the order of the Income Tax authorities who had held, on the facts and circumstances of that case, interest income to be business income.

Although it is unnecessary but we may mention here that normally interest income can be treated as "profits and gains of business" only where investing money and earning interest thereon is itself a "business" of the assessee, and not otherwise.

In the circumstances, we are unable to agree with the decision taken by the Calcutta High Court in INDIAN ALUMINIUM CO. LTD. Vs. COMMISSIONER OF Income Tax, WEST BENGAL-II., Our answer to the first question referred is that, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was not justified in holding that interest income from investment in banks accruing to the assessee should be treated as "income derived from an industrial undertaking" and such interest income is not entitled to deduction u/s 80-I of the Act.

Question No. 2

This question requires consideration whether the deduction u/s 80-I should be allowed on the "gross total income" computed without deductions being made u/s 32AB. Learned Counsel for the department relies upon the definition given in Section 8OB (5). According to that definition as it stands with effect from 1-4-1988, "gross total income" in Chapter VI-A means the total income computed in accordance with the provisions of the Act before making any deduction under the said Chapter VI-A. Thus, the only deductions which are excluded by that definition are those under Chapter VI-A.

More importantly the total income has to be computed in accordance with the provisions of the Income Tax Act. Obviously, the provisions of the Income Tax Act includes Section 32AB.

There are two decisions one by the Delhi High Court and another by the Orissa High Court on this question. The Delhi High Court decision is in the case of Gedore Tools (India) P. Ltd. Vs. Commissioner of Income Tax, . In that decision, the Delhi High Court has held that while computing the "gross total income" for the purpose of Section 80-I, the deduction u/s 35B have to be made first. This decision is in accordance with the contention of the department and the view expressed by us above.

The other decision by the Orissa High Court is in the case of Commissioner of Income Tax Vs. Tarun Udyog, This decision takes a contrary view holding that special deduction u/s 80HH is to be allowed on profits before deducting investment allowance u/s 32A.

We have examined the said decision of the Orissa High Court, the reasons given therein do not appeal to us and we, therefore, agree with the decision of the Delhi High Court in view of the reasons given therein and also in view of the clear words of Section 80B(5) referred above.

Therefore, our answer to the referred question No. 2 is that the Income Tax Appellate Tribunal was not justified in directing that deduction u/s 80-I should be allowed without deducting the amount of deduction permissible u/s 32AB of the Act.

Reference disposed of.