By TIOL News Service

NAINITAL, NOV 30, 2017: THE issue before the Bench is - Whether interest earned by the assessee towards money deposited to open a LC for purchase of plants and machinery is liable to be treated as income for purpose of deduction u/s 80-IC. And the HC verdict is NO.

Facts of the case

The Assessee, an undertaking engaged in manufacturing of electric meters and filed its return for the AY in question. The Assessee claimed the benefit of Section 80-IC of the Act. The AO noted that the Assessee had earned a net profit of Rs. 54,31,995/- and the entire amount was allowed as deduction u/s 80-IC of the Act. However, the CIT observed that the Assessee earned an amount of Rs. 22,29,129/- from bank interest apparently out of Rs. 54,31,995. Though claimed as the business income by the Assessee, the same was actually earned by it by way of interest on fixed deposits, which the Assessee had to maintain for the purposes of the Bank issuing a Bank Guarantee for carrying on the business, to provide for the performance guarantee. The CIT took the view, after noting the judgments of the Apex Court in the cases of Cambay Electrical Supply Co. Ltd. and Pandian Chemicals Ltd. that there was a distinction between the words "derived from" and "attributable to". Accordingly, the CIT distinguished the decisions relied on by the Assessee and proceeded to take the view that the AO was incorrect in including the same for the purpose of computing deduction u/s 80-IC of the Act. Hence, the assessment was cancelled u/s 263 of the Act and it was to be done afresh after taking all aspects discussed into the consideration. On Assessee's appeal, the Tribunal upheld the decision of the CIT and dismissed the appeal filed by the Assessee.

After hearing the parties, the High Court held that,

++ the issue did not arise under Section 80-IC. The issue was, whether the interest earned by the assessee in the said case on the money deposited to open a letter of credit for purchase of plants and machinery would be liable to be treated as capital receipt or whether it would be income. It was found that the deposit of money was directly linked with purchase of plants and, therefore, it was found that the income earned was incidental to acquisition of assets for setting up of the plant and machinery. Therefore, the question, which is deliberated at by the Apex Court, has absolutely nothing to do with the issue that arises in this case. In fact, in this case, the amount in question was credited to the Profit and Loss Accounts and it is actually treated as income by the assessee, and the Account of the assessee was accepted and the Assessing Officer gave deduction treating it as an income from his total income, and the issue, which arose from the order passed by the Commissioner was, whether the interest income could be deducted under Section 80-IC, as it was not derived from the business. Therefore, we would think that the assessee cannot rely on the said judgment;

++ it was not a case of deduction of the income under Section 80-IC or even Section 80HH of the Act. On the other hand, the question was, whether the interest, which was earned, could be set off against the expenses, which were incurred. It is here that the Tribunal's findings came to be noted by the Apex Court, namely, that the interest was capital in nature and it would go against the project expenditure and the same could not be treated as income from other sources. We would, therefore, think that no support can be drawn by the assessee from the said decision;

++ the decision, which would apply in the facts of this case, is the decision in the case of Pandian Chemicals Ltd., as the language, which is employed in Section 80HH is similar to the language used in Section 80-IC. Both in Sections 80HH and 80-IC, the Legislature has chosen to employ the word "derived" as distinguished from "attributable to". Had the Legislature used the words "attributable to", then it would have a much wider effect and it may have encompassed within itself, the income, which is the subject matter of controversy before us. But insofar as a narrow concept has been contemplated by the Legislature for the purpose of grant of benefit of deduction under Section 80-IC, we would think that with regard to the fact that interest, which is earned by the appellant, has nothing to do with carrying on of the business per se, namely, manufacture and sale of the articles in question, the assessee would not be entitled to the benefit of deduction;

++ in Section 80HH and in Section 80-IC, what is contemplated is deduction of the income derived from profits of business. In Section 80-IC, no doubt, it is provided that it may be an income derived by an undertaking or an enterprise. There is no significance to be attached to the employment of words "undertaking or enterprise" in Section 80-IC. As far as resolving the controversy before this Court is concerned, the assessee claims itself to be an undertaking. The employment of the word "enterprise" is essentially to deal with a different form of business organization. Insofar as the assessee is an undertaking, there is no distinction otherwise between the words used in Section 80HH. Further attempt made to draw support from the use of words "from any business" referred to in sub-section (2), in our view, does not deserve any consideration. It is clear that what the Legislature intended was to specify the business, which would entitle the parties to claim deduction under Section 80-IC (2);

++ what the Officer has stated is only that it is treated as a business income, which means that it would be income under Section 28 of the Act, but he has been careful enough to say that the said income is not derived within the meaning of Section 80-IC. Any income, which may be derived from carrying on the business, even if it is incidental, would qualify as business income under Section 28, but that is not the same thing as saying that it is a business income, which is derived from the said business. Therefore, we see no merit in the said contention also. Undoubtedly, in Section 2 (13) of the Act, "business" is defined. A definition clause is, undoubtedly, to be considered when interpreting a Statute, but it is always subject to the context being otherwise. We may notice in this regard Section 28 of the Act, which provides for the income coming under the heading ‘Profits and gains of business or profession'. Contrast the words used in Section 28 (i), it does not use the word "derive"; it also does not specify any particular business as such. The entire income from trade and business would be reckoned under the heading ‘business income'. In other words, under Section 80-IC, a person, an enterprise or an undertaking is entitled to take the benefit of Section 80-IC only insofar as it carries on business, which is mentioned in sub-section (2) of Section 80-IC and derives profits and gains therefrom.

(See 2017-TIOL-2491-HC-UKHAND-IT)