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Judgment
Surya Prakash Kesarwani, J.—This income tax appeal filed u/s 260A of the income tax Act, 1961 (In short the Act) arises out of the order dated 8.2.2001 passed by the Income Tax Appellate Tribunal, Delhi Bench ''C'', New Delhi in I.T.A. No. 2718/DEL/94 for the assessment year 1992-93 wherein the following substantial question of law has been raised:
Whether on the facts and circumstances of the case the ITAT was illegally justified in holding that the interest received from the debtors or customers on delayed payment was income derived from the Industrial Undertaking and Deduction u/s 80HH and 80-I of the IT Act was also admissible on the amount so earned.
We have heard Sri Shambhu Chopra learned counsel for the appellant income tax department and Sri Bhupesh Jain, learned counsel appearing for the respondent assessee and perused the records.
The only ground pressed by Sri Chopra to challenge the impugned order is that the ITAT was not justified to hold that interest received from the debtors/customers on the delayed payment was not income derived from the industrial undertaking and thus the deduction u/s 80HH and 80-I of the Act was not admissible on the amount so earned. Sri Shambhu Chopra supporting the findings recorded by the Assessing Officer on the issue of admissibility of deduction u/s 80HH and 80-I of the Act, submits that the respondent assessee claimed Rs. 1,60,52,674/- and Rs. 2,00,65,843/- being deductions Section 80HH and 80-I of the Act respectively on the gross total income which includes Rs. 22,31,082/- and Rs. 30,420/- representing the amount of interest received and the profit on sale of assets respectively. This resulted in excess claim of deductions u/s 80HH and 80-I of the Act. Before the Assessing Officer the assessee took the stand that it had paid Rs. 3,42,69,412/- as interest which is more than the amount received under the head of ''interest'' and so if these two amounts are consolidated and there would be a debit balance of Rs. 3,20,38,330/-. The Assessing Officer rejected the stand of the assessee with regard to claim of deductions u/s 80HH and 80-I of the Act. Sri Shambhu Chopra submits that C.I.T.(A) committed illegality to direct the Assessing Officer to consider the amount of Rs. 22,31,082/- representing the interest income for allowing deduction u/s 80HH and 80-I to the appellant. He submits that ITAT also committed an error in law to dismiss the departmental appeal. He further submits that the interest received from customers on outstanding balance of sale amount is not an income from industrial undertaking of the assessee company and as such it is not allowable as deduction u/s 80HH and 80-I of the Act. Sri Chopra relied on the following judgments:
(i) Commissioner of Income Tax-III Vs. Malwa Cotton Spinning Mills Ltd.,
(ii) Commissioner of Income Tax Vs. Visakha Industries Ltd.,
(iii) Commissioner of Income Tax and Others Vs. K.T. Kunjumon,
(iv) Commissioner of Income Tax Vs. Alpine Solvex Ltd.,
(v) Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa,
(vi) Commissioner of Income Tax Vs. Paras Oil Extraction Ltd.,
(vii) The Totgars'' Cooperative Sale Society Limited Vs. Income Tax Officer, Karnataka,
Per contra Sri Bhupesh Jain submits that interest received on delayed payment against credit sales is part of the contract of sale and thus part of sale consideration of the products manufactured in the industrial undertaking. The income so received is the income from industrial undertaking. He submits that the interest so received is covered under the provision of Section 80HH of the Act inasmuch as it is the part of the profit and gains derived from the industrial undertaking. In support of his submission he relied on the following judgments:
(i) Govinda Choudhury & Sons (supra) para 6.
(ii) CIT v. Vidyut Corpn. [2010] 324 ITR 221 (Bom.), para 6.
(iii) CIT v. Poddar Pigments Ltd. [IT Appeal No. 347 of 2010] para 4 and 5
(iv) Commissioner of Income Tax Vs. Jackson Engineers Ltd., .
(v) Commissioner of Income Tax Vs. Advance Detergents Ltd.,
(vi) Phatela Cotgin Industries (P) Ltd. Vs. Commissioner of Income Tax, .
(vii) Tata Sponge Iron Ltd. Vs. Commissioner of Income Tax, .
(viii) Commissioner of Income Tax Vs. Indo Matsushita Carbon Co. Ltd.,
(ix) Nirma Industries Limited Vs. Deputy Commissioner of Income Tax, .
Our Findings:
We find that as per Section 80HH of the Act where the gross total income of an assessee includes profit 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 of the assessee, deduction from such profit and gains of an amount equal to 20% thereof.
While considering the facts of the case and with regard to question of admissibility of deduction u/s 80HH and 80-I of the Act to the respondent assessee, the CIT(A) has recorded the findings in paragraphs 10 and 11 as under:
Ground No. 8 is regarding disallowance of deduction u/s. 80HH & 80-I in respect of interest income and profit on sale of assets. The ld. Counsel of the appellant has not pressed for such deduction in respect of profit on sale of asset or Rs. 30,480/-. Hence this amount representing sale of assets is not considered. Regarding consideration of interest income amounting to Rs. 22,31,082/- for deduction u/s. 80HH and 80-I, the A.C. held that the income from interest does not constitute individual income so as to qualify for deduction u/s. 80HH & 80-I. The ld. counsel of the appellant submitted that interest was received from customers in the course of business of the assessee for the amounts outstanding against them on account of credit sales etc. As sale was integrated part of this business run by the appellant, the interest received on a/c of outstanding balances has to be considered as income of individual undertaking belonging to the assessee. In view of the above, the A.O. Is directed to consider the amount of Rs. 22,31,082/- representing interest income for allowing deduction u/s. 80HH and 80-I to the appellant.
Next ground of appeal is regarding not allowing deduction u/s. 80-I on the total amount considered for allowance u/s. 80HH. While allowing deduction u/s. 80-I, the A.O. deducted the amount of allowance u/s. 80HH from the gross total income and circulated allowance on the remainder holding that it was in accordance with Sub-Section 8 of Section 80HH. The ld. A.R. of the appellant submitted that the A.O. misrepresented the provision of Section 80HH(9) and restriction of allowance u/s. 80-I was not according to the provision of law. The appellant relied on the decision of ITAT, Jaipur Bench in appeal No. ITA 653/JP/85 for A.Y. 83-84 and Ramnath Exports Pvt. Ltd. Vs. IAC (Delhi) in ITA No. 14 (I)/Del/88 for A.Y. 84-85 of ITAT Delhi Bench considering the above decision and provision of Section 80HH(9), it is sent that the A.O. has misrepresented the provisions of calculation for purpose of allowing deduction u/s. 80-I has to be done on the whole amount of gross total income and not on the remainder after giving allowance u/s. 80HH. The A.O. is, therefore, directed to allow deduction u/s. 80-I on gross total income of the appellant.
Aggrieved with the order of the CIT(A) the Appellant department preferred an appeal before the ITAT. The ITAT considered the facts and provisions in detail in paragraph 3 to 10 of the impugned order and recorded the findings in paragraph 11 as under:
Next ground of appeal is regarding not allowing deduction u/s. 80-I on the total amount considered for allowance u/s. 80HH. While allowing deduction u/s. 80-I, the A.O. deducted the amount of allowance u/s. 80HH from the gross total income and calculated allowance on the remainder holding that it was in accordance with Sub-Section (8) of Section 80HH. The ld. A.R. of the appellant submitted that the A.O. misrepresented the provision of Section 80HH(9) and restriction of allowance u/s. 80-I was not according to the provision of law. The appellant relied on the decision of ITAT, Jaipur Bench in appeal No. ITA 653/JP/85 for A.Y. 83-84 and Ramnath Exports Pvt. Ltd. Vs. IAC (Delhi) in ITA No. 14 (I)/Del/88 for A.Y. 84-85 of ITAT Delhi Bench considering the above decision and provision of Section 80HH(9), it is sent that the A.O. has misrepresented the provisions of calculation for purpose of allowing deduction u/s. 80-I has to be done on the whole amount of gross total income and not on the remainder after giving allowance u/s. 80HH. The A.O. is, therefore, directed to allow deduction u/s. 80-I on gross total income of the appellant.
In Govinda Choudhury & Sons (supra), Hon''ble Supreme Court has held in paragraph 6 as under:
This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee''s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head "Income from other sources" only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the award and treated as "income from other sources". The second question is, therefore, answered in favour of the assessee and against the revenue.
In the case of Poddar Pigments Ltd. (supra), the Delhi High Court has considered the admissibility of deduction u/s 80IB of the Act with respect to interest received from trade debtors and held in paragraphs 4 and 5 as under:
The court also considered the decision of the Supreme Court in the case of Liberty India Vs. Commissioner of Income Tax, and came to the conclusion that the view taken by the Gujarat High Court and other High Courts on the question of interest paid on delayed payment is the appropriate view. The Gujarat High Court was of the view that interest on delayed payment was nothing but a higher sale price which is the converse situation to offering of cash discount and thus the transaction remains the same and there is no distinction as to the source.
Considered from this point of view, interest becomes part of the sale price and, therefore, would be clearly derived from the sales made and was not divorced therefrom. Consequently, it was held that such interest would be the direct result of the sale of goods and the income would definitely fall within the expression "derived from" the business of industrial undertaking as appearing in Section 80-IB of the said Act.
In the case of Jackson Engg. Ltd. (supra), the Delhi High Court held that delayed payment from customers against sale would curtail the character of price itself and would be included in the sale consideration and thus, that income would be treated as income derived from business. The relevant paragraphs No. 9 and 11 of the said judgment are reproduced below:
In this case, the interest was received from customers. The AO held that the interest income was not derived from the undertaking and therefore, did not allow deduction under S. 80-IA in relation to the said interest. The Tribunal, however, has allowed this claim holding that the said interest income would be incidental or attributable to business of undertaking.
No doubt in the present case, it is stated that interest from customers was charged: however, it is not clear as to whether it was on account of delayed payment. If that is the case, then the view of the Tribunal is correct in law. This aspect came up for consideration before this Court in IT Appeal No. 248 of 2009 and other connected cases, entitled as Commissioner of Income Tax Vs. Advance Detergents Ltd., applying the principle of Liberty (supra). It was held the interest on delayed payment from customers against sales would partake character of price itself and would be included in the sale consideration and thus, that income would be treated as income derived from business. Following are the discussions on the subject from the said judgment.
In the case of Advance Detergents Ltd. (supra), while considering the provisions of Section 80-IA of the Act, the Delhi High Court again took the view that an assessee is entitled to deduction u/s 80-IA on interest received from trade debtors and observed in paragraphs no. 11, 12, 13, 14, 15 and 16 as under:
The respondent assessee, which is an industrial undertaking, had supplied goods to its various customers which had been manufactured by it. Some of these customers did not make payment in time. The dues which were payable by those buyers attracted interest on late payment charges. In this manner, ultimately, the payments which were received by the assessee against the supply of goods also included interest on overdue payments.
Precisely, this very issue came up for consideration before the Gujarat High Court in the case of Nirma Industries Limited Vs. Deputy Commissioner of Income Tax, . That was also a case where interest was received by the assessee from the debtors for late payment of the sale proceeds and the question was as to whether this interest can be treated as the income derived from the business for the purpose of Section 80-I of the Act. Answering the question in favour of the assessee, the Gujarat High Court relied upon the judgment of the Apex Court in the case of Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa, in which case the Supreme Court had held that interest was of the same nature as other trading receipts in the following manner:
... The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee''s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head ''Income from other sources'' only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as ''income from other sources''....
The Gujarat High Court approached the issue from another angle for arriving at the same conclusion. It observed that when the assessee enters into a contract for sale of its products it could either stipulate (a) that interest at the specified rate would be charged on the unpaid sale price and added to the outstanding till the pint of time of realisation, or (b) that in case of delay the payment for sale of products worth Rs. 100 to carry the sale price of Rs. 102 for first month''s delay, Rs. 104 for second month''s delay, Rs. 106 for third month''s delay and so on. If the contention of revenue is accepted merely because the assessee has described the additional sale proceeds as interest in case of contract as per illustration, (a) above, such payment would not be profits derived from industrial undertaking, but in case of illustration (b) above, if the payment is described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum and substance these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without delay. Purchaser pays higher sale price if it delays payment of sale proceeds. In other words, this is a converse situation to offering of cash discount. Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state-that the source for interest is the outstanding sale proceeds.
Thus, according to the Gujarat High Court, when interest is paid on delayed payment, it can be treated as higher sale price which is converse situation to offering of cash discount because the transaction remains the same and there is no distinction as to the source. Looking from this angle, the interest becomes part of the hire sale price and is clearly derived from the sales made and is not divorced therefrom. It is, thus, the direct result of the sale of goods and the income is derived from the Business of industrial undertaking.
Same view is expressed by various other High Courts in the following judgments:
(i) Phatela Cotgin Industries (P) Ltd. Vs. Commissioner of Income Tax,
(ii) Commissioner of Income Tax Vs. Flender Macneill Gears Ltd., .
(iii) Tata Sponge Iron Ltd. Vs. Commissioner of Income Tax,
(iv) Commissioner of Income Tax Vs. Indo Matsushita Carbon Co. Ltd.,
There is no reason to depart from the aforesaid view taken consistently by various High Courts, which is in tune with the principle laid down by the Supreme Court in Liberty India (supra). We answer this question in favour of the assessee and against the revenue.
In the case of Phatela Cotgin Industries (P) Ltd. (supra), the Punjab and Haryana High Court while considering the similar question with reference to Section 80HH read with section 80-I of the Act held that the interest received on delayed payments of the sale consideration of manufacturer goods is clearly income derived from industrial undertaking. That being so the Tribunal was clearly unjustified in not allowing benefit u/s 80HH and 80-I to the appellant.
In the case of Tata Sponge Iron Ltd. (supra), the Orissa High Court also considered the admissibility of deduction u/s 80HH with regard to the interest earned from customers for delayed payment and for bill discounting and held in para 29 as under:
Interest earned by the assessee from its customers for delayed payment and for bill discounting, such interest income does bear a direct and immediate nexus with the industrial undertaking of the assessee and therefore, interest earned from the customers, for delayed payment and bill discounting, are held to be income "derived" from the petitioners industrial undertaking and therefore, entitled for relief u/s 80HH
In the case of Indo Matsushita Carbon Co. Ltd. (supra), the Madras High Court also took the similar view with regard to deduction u/s 80HH read with Section 80-I of the Act in respect of interest received by assessee on over dues from trade debtors and held the same to be eligible for relief u/s 80HH and 80-I of the Act.
In the case of Nirma Industries Ltd. (supra), the Gujarat High Court while considering the admissibility of deduction u/s 80-I of the Act took the similar view.
The judgment relied by Sri Shambhu Chopra, in the case of Malwa Cotton Spinning Mills Ltd. (supra) relates to special deduction u/s 80HHC of the Act in which the Punjab and Haryana High court has held as under:
What has been held in Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa, is that in the case of a contractor, interest received on delayed payment is a business income and not income from other sources. The same view was taken by the Hon''ble Supreme Court in Commissioner of Income Tax Vs. B.N. AGARWALA and CO., . in the present case also, interest received by the assessee on delayed payment by the customers has been assessed as the business income. It is at the time of determination of profits of business or the purpose of clause (baa), as referred to above, that the interest component added therein is to be excluded to give effect to the provisions in its true letter and spirit.
The findings recorded by Punjab and Haryana High Court in the afore noted judgment does not support the case of the revenue and, therefore, it is of no help to the appellant.
The next judgment relied by Sri Shambhu Chopra is the judgment of Andhra Pradesh High Court in the case of Vishakha Industries Ltd. (supra) wherein the facts are different. The next judgment relied by Sri Chopra is of Madhya Pradesh High Court in the case of Alpine Solvex Ltd. (supra) which interpreted Section 80HH and 80-I giving a narrow meaning. With respect we do not agree with the view taken by the Madhya Pradesh High Court in the case of Alpine Solvex Ltd. (supra) In view of detail reasons given in the judgments of various High Court''s referred in foregoing paragraphs.
The next judgment relied by Mr. Chopra is the judgment of Hon''ble Supreme Court in the case of Govinda Choudhury & Sons (supra) in which the issue was with regard to amount of interest on arbitration award which is not the controversy involved in the present case.
It is undisputed that the respondent assessee received interest from trade debtors on outstanding balances. The interest so received is part of contract of sale and thus it is income from industrial undertaking belonging to the respondent assessee. The very source of interest so received is as per terms of contract of sale of goods manufactured in the industrial undertaking. Hence, it is inseparable part of contract of sale. Consequently it forms part of income of the assessee from the industrial undertaking and is thus eligible for deduction u/s 80HH of the Act.
We agree with the view taken by the High Courts of Bombay, Delhi, Punjab and Haryana, Orissa, Madras and Gujarat in the afore noted judgments.
In view of the above we are of the view that the ITAT has correctly dismissed the appeal of the revenue. The impugned order of the ITAT does not suffer from any illegality. The question raised is decided in favour of the assessee and against the revenue. In result the appeal fails and is hereby dismissed. However, there shall be no order as to the cost.