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TMI Blog2003 (3) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... guests also as coming within purview of the disallowance under section 37(2A)." After hearing both the sides and going through the record, we direct the Assessing Officer to consider the disallowance under section 37(2A) after allowing 2096 on account of employees participation as being done in similar type of other cases and allow necessary relief to the assessee. 4. Ground Nos. 3 and 4 read as under: "3. The learned CIT(A) erred in not allowing 80-I relief in respect of income earned from erection, installation and after sales service activity of the company, which activity is very much part and parcel of industrial undertaking. This activity is inseparable from industrial undertaking. He ought to have followed the ratio of following court cases: (a) Cambay Electric Supply Co. v. CIT (113 ITR 84) (b) Buckau Wolf v. CIT (l50 ITR 180 (Bom.)); 4. The learned CIT(A) also erred in not allowing 80-I relief in respect of interest earned, which is part of business income. In fact the CIT(A) erred in treating the interest income as income earned from investments. However, the interest earned is mostly for the interest charged to the customer, for late payments of the bills, as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company, which is the activity stated to be very much part and parcel of industrial undertaking, is inseparable and assessee is entitled to relief. Similarly, interest earned which is mostly for the interest charged to customers for late payment of bills is a part of business income, for the purpose of section 80-I which has not been allowed by the Assessing Officer. Therefore, while following decision of the Calcutta High Court in CIT v. Flender Macheill Gears Ltd. [1984] 150 ITR 83 it was pleaded for allowing the relief. Similarly, it was pleaded that the interest is also derived from industrial undertaking and hence eligible for deduction under section 80-I. 7. The learned D.R. while relying on the basis and reasoning as given by the authorities below pleaded for confirmation of the impugned order. It was also submitted that the assessee is manufacturing and selling generating sets and at the option of purchaser, the assessee also provides erection, installation and after sales service to such customers who intend to get such services. Since assessee's counsel has himself admitted that even sale of generating set can be affected without providing of the these serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales service besides interest income. Since the claim included erection, commissioning and after sales service charges and income from interest, therefore, in view of the ratio of decisions as noted by the Assessing Officer, claim to the extent of Rs. 19,12,855 was disallowed by the Assessing Officer and CIT(A) confirmed his action. 10. In order to judge the claim of the assessee, it would relevant to discuss the issue in detail. Earlier deduction in this regard was being allowed under section 80E and the distinguishing feature of the earlier section 80E and the existing one is that earlier the expression 'profit attributable to priority industry' was on the statute book while in the existing provision Legislature has used expression 'any profits' and gains derived from industrial undertaking. The controversy had since been going on before the Courts about the scope and actual meaning of the expression 'attributable to' and 'derived from' and Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd., for the first time made distinction in the above referred two expressions and relevant observations are at pages 93 and 94 which are reproduced as under: "As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Electricity Board and earned interest such interest income cannot be said to have derived from industrial undertaking as immediate source of interest is the deposit and not business. Their Lordships of Hon'ble Madras High Court have further opined that mere fact that interest amount was assessable as business income itself would not be sufficient unless the source of profit is the undertaking. Therefore, it was held that the assessee is not eligible to claim deduction and there were no compelling reasons to give wider meaning to the expression 'derived from' under section 80HH to cover every aspect. Further, it will be pertinent to mention that S.L.P. filed by the assessee has since been rejected, as the intention of the Legislature was that industrial undertaking must be the source of the profits or gains (Pandian Chemicals Ltd. v. CIT [SLP (Civil) No. 8014 of 2000]. 14. To the same effect, in order to arrive at the conclusion, Hon'ble Madras High Court has followed the ratio of the above judgment of Pandian Chemicals Ltd. in the case of Fenner (I.) Ltd. v. CIT (No.2) [2000] 241 ITR 803 (Mad.). Further, Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [2000] 68 TTJ (Pune) 422, for the reasons given in those orders, we uphold the action of the authorities below and hold that net profit out of receipts on erection, commissioning and after sales service and interest income on bank deposits and on IDBI deposits are not eligible for deduction under section 80-I as claimed by the assessee. Therefore, these grounds of appeal of the assessee are dismissed. So far as the Bombay High Court decision is concerned, the same is relatable to words 'attributable to' as existing in the earlier provision and not 'derived from'. Therefore, the same cannot be of any help to the assessee. 16. As regards ground Nos. 5(a) and 5(b) are concerned, it is contended by the learned counsel for the assessee that the issue is covered in favour of the assessee by the decision of the Supreme Court reported in 236 ITR 508 (sic) whereas the learned D.R. relied upon the Supreme Court decisions in CIT v. Karam Chand Thapar [1996] 222 ITR 112 and 222 ITR 244 (sic) to argue that the addition made is liable to be confirmed. 17. After hearing both the sides and going through the orders of the authorities below we find that the entire facts of the case are not cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Pune Bench in the cases of Jagdish Electronics P. Ltd. and Finolex Pipes P. Ltd., and in the fitness of the things, it has been suggested that the issue involved in this case should be decided after the receipt of the decision of the Third Member in the case of Kripa Chemicals P. Ltd. 2. In this regard I have to state that in the case of Kripa Chemicals P. Ltd., reservation to follow the decision in the case of Vardhini Udyog was shown by you as under: "Apropos to your note, I have to state that in this case, the Cross Objection was decided for the same year by the Bench constituted by me and Brother Singhal on 6-12-2000 and the matter was restored to the file of the Assessing Officer following the decision of this Bench in the case of Jagdish Electronics Ltd. So the matter already stands restored and now an opposite view cannot be taken, when in the same year in the cross-objection the matter has been restored back to the file of the Assessing Officer. In the cross-objection we had followed an earlier order in the assessee's own case relating to assessment year 1990-91 in ITA No. 1160/PN/92. In any case the matter is being restored to the file of the Assessing Officer ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to agree with the conclusions of my learned brother Judicial Member on ground Nos. 3 & 4, I proceed to write a dissenting order. 2. The assessee company is engaged in the business of manufacturing gen-sets for industrial use. The normal features of a business engaged in manufacture and sale of capital goods is to ensure proper installation, commissioning and running of the equipment during the warranty period. The contract of sale invariably contains the clause regarding installation and commissioning. Though it is theoretically possible that A may manufacture and sell the equipment and B may do the installation and commissioning; but it is noted that in the assessee company's case there is not a single instance in last decade where the two activities were bifurcated and carried on by two different persons. A statement to this effect was made by the learned counsel Shri S.N. Inamdar in the open Court. Further this is simply because manufacturer's warranty is involved. 3. It was never disputed before the Bench that the expression 'derived from' is narrower than the expression 'attributable to' But that did not mean that when ten activities are so inter-linked with an immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of the profit and not some independent activity somehow connected with the undertaking. The decision in CIT v. Wheels India Ltd. [1983] 141 ITR 745 (Mad.) also supports this view. Accordingly, 1 hold that the assessee will be entitled to relief under section 80-I of the Income-tax Act in respect of the income earned from erection, installation and after sales service activity of the company which activity is very mch part and parcel of the industrial undertaking. Ground No.3 is accordingly allowed. 8. As regards ground No. 4, the claim of the assessee is a limited one. It was submitted by Shri Inamdar that as regards the interest charged to customers for late payment of sale price, it is nothing but extra sale price received on account of delay in payment. According to him, it is very much part and parcel of the sale activity howsoever narrowly construed. 9. As regards interest on fixed deposits, Shri Inamdar submitted, firstly that the deposits only represent profits from the undertaking kept in normal banking channel and, secondly, such fixed deposits had to be kept with the bank as margin money to avail of credit facilities. They are inseparable part of the undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in the cases of Jagdish Electronics P. Ltd. and Finolex Pipes Ltd. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 U.B.S. Bedi, Judicial Member.--As there is a difference of opinion between the Members on the Bench, following points of difference are being referred to Hon'ble President for hearing on such points or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: "(1) Whether net profit out of receipts on erection, commissioning and after sales service and interest income on bank deposits as well as IDBI deposits is eligible for deduction under section 80-I or not; (2) Whether the decision of first dictating Member on the grounds other than ground Nos. 3 and 4 in the absence of specific agreement of other Member can be taken as decision of the Bench or not? ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 U.B.S. Bedi, J.M.--As there is difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the President of the Income Tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 7-3-2003 has concurred partly with the view of A.M. and partly with J.M. In accordance with the majority view, we hold that the assessee is not entitled to deduction under section 80-I of the Act in respect of (i) service charges for erection and commissioning of machinery, and (ii) interest received from FOR made with the Bank, and so far as interest received from customers for delayed payment is concerned, we hold that the assessee is entitled to deduction under section 80-I on this item and other part of the order remains unchanged. 3. As a result, appeal of the assessee gets partly accepted. THIRD MEMBER ORDER M.K. Chaturvedi, Vice-President.--This appeal came before me as a Third Member to express my opinion on the following question:-- "Whether in view of the facts and circumstances of the case, the order of the CIT(A) with respect to non-allowability of deduction under section 80-I with respect to items indicated by him can be confirmed as held by the JM or the issue is liable to be set aside to be decided afresh by the Assessing Officer as per directions issued by the AM?" 2. I have heard the rival submissions in the light of material placed before me and precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word "democracy" is derived from the Greek word "demos", the people, and most dictionaries will so state. That is the ordinary meaning of the words "derived from" and there is no reason to depart from that ordinary meaning here. 7. In the case of Fryerv. Morland, 45 LJ Ch. 820, Justice Jessel, MR said: "how can you say that the interest of the purchaser is 'derived from' the vendor. He does not derive his interest from the vendor; he derives it from his own money which brought the property. You would not say, if you were talking of a horse. You had bought, that you derive your interest in that horse from the horse dealer. You would say you bought it with your money. 8. It is therefore evident that the term "derive" connotes to draw or receive, or obtain as from a source or origin. The deduction under section 80-I of the Act is to be allowed with reference to the profits and gains derived from an eligible industrial undertaking. The expression "derived from" has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce new goods by a process which mayor may not amount to manufacture. 12. Many precedents cited pro et con (for and against) to explain the word "derive" in the context of the facts of the present case. I now proceed to deal with the precedents. 13. In the case of Orissa State Warehousing Corpn. v. CIT [1999] 237 ITR 589, the Hon'ble Supreme Court was concerned with the interpretation of section 10(29) of the Act. The pre-requisite for the entitlement apropos the claim for exemption was the income derived from letting out of godowns etc. The Apex Court held that the Legislature was careful enough to introduce in the section itself, a clarification by using the words "any income derived therefrom", meaning thereby obviously for marketing of commodities by letting out of godowns or warehouses for storage, processing or facilitating the same. If the letting out of god owns or warehouses is for any other purpose, the question of exemption would not arise. Section 10(29) of the Act is categorical in its language and this exemption is applicable only in the circumstances as envisaged under the section. The word "any income" as appearing in the body of the statute is restrictive in its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In this case the Apex Court found that the nexus was not direct but only incidental. As such, the exemption was denied. 16. In the case of Hindustan Lever Ltd. v. CIT [1999] 239 ITR 297, the Apex Court has held that 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. In this case the assessee exported groundnut oil which resulted in loss. However, for the exports made at a loss, the assessee was rewarded with import entitlements. It utilised the import entitlements in purchasing palm oil from foreign countries. The imported palm oil was consumed internally by the assessee for manufacturing other products. The contention of the assessee was that the oil, which was purchased by the assessee from foreign countries on the strength of the import entitlement, was at a rate much lower than the rate obtaining in the Indian market for similar products. Since the assessee paid a lower price for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision. It would, therefore, not be apt to follow the purposive theory of interpretation. The word "derived" cannot be construed on the pattern of the word "attributable". There is ample authority on the proposition that the word "derived" is narrower in application comparing with the word "attributable". Keeping all those norms as are set out in the precedents cited above, I now decide the issues on the factual matrix of the case. 19. In the context of service charges for erection and commissioning, the learned counsel for the assessee placed reliance on the decision rendered in the case of Buck au Wolf New India Engg. Works Ltd. In this case the Hon'ble High Court has held that profits from matching charges for repairs to machinery and interest on unpaid sale proceeds of machinery are attributable to priority industry. These were held eligible for deduction under section 80-I of the Act. The Court held that carrying out of repairs to machinery manufactured and sold by the assessee was an activity, which had a direct nexus to the priority industry. This decision was rendered when the word used in the statute was "attributable to" and not "derived from". Direct nexus is nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allowability of interest from FDR was argued. In the case of Pandian Chemicals Ltd it was held that interest was not profit derived from industrial undertaking. As such, it should not be taken into account in computing special deduction. This decision was rendered in the context of interest on deposits which Electricity Board made out of statutory compulsion. 25. In the case of CIT v. Menon Impex P Ltd. [2003] 259 ITR 403 (Mad.) it was held that interest received on deposits is not derived from exports. In this case the deposit was made in bank for opening Letters of Credit. 26. In the case of South India Shipping Corpn. Ltd. v. CIT [1999] 240 ITR 242 (Mad.) interest was paid on overdraft taken for business. Hon'ble High Court has held that this interest is not to be deducted from interest on bank deposits. 27. The Apex Court in the case of CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449 has held that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did ..... X X X X Extracts X X X X X X X X Extracts X X X X
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