TMI Blog2007 (4) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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 under section 80HH. Applying the provisions of Pandian Chemicals Ltd.[2003 (4) TMI 3 - SUPREME Court] it is of the view that interest earned by the assessee from the deposits made in bank and inter-corporate deposits, though attributable to the business of the assessee, is a step removed from the assessee's industrial undertaking and therefore, cannot be held to have been "derived from" the industrial undertaking in order to qualify for relief under section 80HH. Thus the interest earned by the assessee from the deposits with banks or intercorporate deposits (items Nos. 1 and 2) do not qualify for relief under section 80HH. The Income-tax Appellate Tribunal erred in disallowing relief under section 80HH of the Act in so far as interest received of ₹ 1,63,04,937 is concerned and the Tribunal also erred in disallowing "set off" of interest payment of ₹ 2,35,38,917 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are not allowable and therefore, the Tribunal affirmed the addition of such expenditure into the income assessable of the assessee. Shri S. N. Ratho, learned counsel for the appellant submitted that this question is no longer res integra and has been settled against the assessee and in favour of the Revenue by the hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 and in view of such determination, question No.1 need not be answered. Shri Akhil Mohapatra, learned counsel for the Revenue also affirms the same and accordingly, question No.1 is decided against the assessee and in favour of the Revenue in the light of the judgment of the apex court referred to above. In so far as the second question of law noted hereinabove is concerned, the same relates to a claim of deduction under section 80HH of the Act. Shri Ratho, learned counsel for the appellant submitted that the assessee earned interest from various sources noted hereinbelow: Interest from (Rs.) 1. Deposit with bank 54,88,403 2. Inter-corporate deposits 93,93,102 3. Customers 99,42,335 4. Bill discounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case, inasmuch as, the appellant in the present case, had not earned any interest from similar deposits with any electricity board. He reiterated that the interest earned on the deposit in Pandian Chemicals' case was taken not to be a deposit made for the purpose of its business. He submitted that in the present case at hand, each of the four heads on which the present appellant earns interest, ought to be cumulatively accepted as an act of prudent management on the part of the assessee to utilize its resources for the best interest of the company. It is further submitted that interest from deposits in bank (item No.1) was the interest earned by the assessee from bank deposit of funds not immediately required by the appellant-company and therefore, was an act of prudent financial management on the part of the assessee. Interest earned from delayed payment by the customers (item No.3) was the interest paid by the customers who delayed payment for sale proceeds. It is further submitted that the assessee did not do any additional voluntary act, unlike Pandian Chemicals' case making deposits and that the sale of manufactured articles and collection of payment thereof is an insepara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the benefit was directed to the setting up and also the efficient working of the priority industries." He has further placed reliance on the judgment of the apex court in the case of CIT v. J. H. Gotla [1985] 156 ITR 323 wherein the apex court laid down the principles of interpretation of statutes in the following manner: "Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction." A further contention advanced by Mr. Ratho, was to the effect that the legislative intent behind the enactment of section 80HH (introduced with effect from April 1, 1974) can also be inferred from a conscious omission to amend section 80HH when the Legislature amended section 80HHC by the Finance (No.2) Act, 1991, by introducing the Explanation (baa) in section 80HHC. By inserting Explanation (baa), the bulk of the relief on items enumerated therein (namely, interest, commission etc.) was withdrawn. Shri Ratho submitted that no similar amendment or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for earlier years as income from business. (6) Exemption under section 80HH continues and that too without any amendment similar to the amendment made to section 80HHC. Shri Ratho advanced an alternative argument without prejudice to the earlier contentions, that in the event of any of the heads of income of interest would fail to pass the test of eligibility under section 80HH(1), in that event, he contended that the profit and loss account of the assessee shows that Rs. 2,35,38,017 has already been paid as interest on borrowed funds of the assessee whereas a sum of Rs. 2,12,44,107 has been earned from the three items under consideration. He further submitted that the said income earned and interest paid on borrowed capital, have been shown separately only to conform to the requirements of Schedule VI, Part II, section 3(v) and section 3(xi)(b) of the Companies Act, 1956, which mandates that "expenditure for interest" to be shown at expenditure side and the "interest income" to be shown on the income side of the profit and loss account. Shri Ratho submitted that two heads of income i.e. interest paid and interest earned have been shown separately otherwise the same would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in the case of Pandian Chemicals and submitted that the Tribunal has correctly applied the ratio of this judgment to the facts and circumstances of the present case thereby not requiring any interference by this court in exercise of its appellate jurisdiction under section 260A of the Income-tax Act, 1961. Shri Mohapatra submitted that section 80HH of the Act grants deduction only in respect of the profit and gains "derived from" an industrial undertaking and stated that in the aforesaid judgment the apex court has clearly stated that the words "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has immediate nexus with the assessee's industrial undertaking. He further submitted that interest earned by the assessee under all the four heads of interest earned in the present case is a step removed from the business of industrial undertaking, its manufacture and sale of sponge iron. He accordingly submitted that deriving an income of interest on deposits made with banks and/or customers cannot be said to flow directly from the industrial undertaking of the assessee i.e., manufacture and sale of sponge iron. Accordingly, the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent assessee is not due to any deposit made with the electricity board. Despite this distinction of facts, it has to be determined as to whether interest earned by the present assessee from "banks and intercorporate deposits" (items Nos. 1 and 2) and interest earned by the assessee on account of delayed payment by the customers, (items Nos. 3 and 4) can be equated with interest on deposits with the electricity board. In the case of Pandian Chemicals [2003] 262 ITR 278, the apex court was dealing with section 80HH(1) which is quoted herein below: "Where the gross total income of an assessee includes any profits 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, a deduction from such profits and gains of an amount equal to twenty per cent. thereof." The hon'ble Supreme Court considered section 80HH of the Act which grants deduction in respect of the profits and gains "derived from" an industrial undertaking. The apex court also took note of the fact that the words" derived from" had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but it has also extended thereof to the sale of manufactured items. Therefore, we are of the view that any interest earned by the assessee which has direct or immediate nexus with either manufacture or sale of its product has to be accepted to be an income which qualified as an income under section 80HH. As contended by learned counsel for the appellant, we are of the view that 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 under section 80HH. Applying the provisions and the ratio of the judgment in the case of Pandian Chemicals Ltd.,- we are of the view that interest earned by the assessee from the deposits made in bank and inter-corporate deposits, though attributable to the business of the assessee, is a step removed from the assessee's industrial undertaking and therefore, cannot be held to have been "derived from" the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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