Dy. Commissioner of Income Tax vs Arat Electro Chemicals Ltd.

D.A. Mehta, J.—At the time of admission, the following identical question of law was formulated by this Court in both these appeals, vide order dated 21-2-2000:

Whether, the Tribunal is right in law and in facts in holding that the assessee is entitled to deduction u/s 80-I in respect of the interest income earned on the securities kept with the Electric Department as well as the interest income earned on FDRs kept for margin money for obtaining letters of credit for the procurement of raw-materials ?

The appeals are relatable to assessment years 1990-91 and 1991-92 respectively. As common issue is involved, the appeals are heard together and disposed of by this common order.

The assessing officer came to the conclusion that while working out relief u/s 80-I of the Income Tax Act, 1961 (the Act), interest to the tune of Rs. 1,85,922 for assessment year 1990-91 and interest to the tune of Rs. 1,97,340 for assessment year 1991-92 was not includible in the profits and gains derived from industrial undertaking as the said items of interest had no direct nexus with the industrial undertaking.

The assessee carried the matter in appeal for both the years before the Commissioner (Appeals) who agreed with the view of the assessing officer. However, in the second appeal before the Tribunal, the assessee succeeded.

The Tribunal has given break-up of the total interest as having been earned from:

(i) Securities kept as deposit with Electricity Department, and

(ii) Fixed deposit receipts kept with bank as margin money.

According to the Tribunal, the interest income earned on security deposit from the Electricity Department was required to be included in the profits and gains derived from industrial undertaking because without an electric connection, the industrial undertaking was not in a position to operate. Similarly, insofar as the second item of interest is concerned, the Tribunal came to the conclusion that for the purposes of procuring imported raw-materials, the assessee was required to furnish letters of credit which were made available to the assessee only upon the assessee depositing margin money with the bank in the form of fixed deposits. Thus, according to the Tribunal, the assessee was entitled to deduction u/s 80-I of the Act by including the aforesaid two items of interest.

On behalf of the appellant revenue, in the present two appeals, Mr. B.B. Naik, learned standing counsel submitted that the issue is no longer res integra, and for this purpose, placed reliance on the Apex Courts decisions in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, and also in the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, to submit that both the items of interest were required to be excluded from the total figure of profits and gains which were eligible for relief u/s 80-I of the Act.

On behalf of the respondent-assessee, Mr. Varun Patel, learned advocate appearing for Mr. S.N. Soparkar, senior advocate, submitted that the learned Counsel for revenue was correct in pointing out that the issue was concluded by the aforesaid two decisions of the Apex Court.

In the case of Pandian Chemicals Ltd. v. CIT (supra) the Apex Court has stated that the words derived from must be understood as something which has direct or immediate nexus with the appellants industrial undertaking. In a case of similarly situated assessee, the Apex Court further went on to state as under:

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.

Applying the aforesaid ratio to the facts of the case, the questions relatable to both the appeals are required to be answered in the negative, i.e. in favour of the Revenue and against the assessee.

The appeals are allowed accordingly. No order as to costs.