TMI Blog2018 (8) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... s a joint venture concern engaged in manufacturing, fabrication, erection, commissioning of pen stock steel liner, steel Radial Gates of Hydro- mechanical works/equipments in the State of Arunachal Pradesh. During the year under consideration, the assessee has declared gross total income of ₹ 14,22,58,195/- and the same has been claimed as exempt u/s 80IE and total income has been declared at Nil. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee has shown income under the head Other sources amounting to ₹ 4,47,166 which consists of interest on income tax refund amounting to ₹ 3,53,135/- and miscellaneous receipts of ₹ 94,031/-. As per Assessing Officer, in order to claim deduction u/s 80IE, the profits should have been derived by the undertaking from manufacture or production of eligible article or thing. It has been held by the Assessing Officer that there must be direct nexus between profit and manufacturing activity of the industrial undertaking. The income from other sources may constitute profit of business u/s 28 but it cannot be construed as profits derived by the industrial undertaking. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax refund in the case of the assessee which is eligible for deduction u/s 80IE is business income and not income from other sources. The amount of refund against TDS or excess tax paid is a capital receipt, therefore statutory accretion to the same should also be considered as capital receipt or if the business funds are invested in TDS, then it is in the nature of business income. 7. In support reliance, the ld AR placed on the decision of Hon ble Karnataka High Court in case of Hubli Electricity Supply Co. vs. DCIT (2018) 404 ITR 462 (Kar) wherein it was held that interest income on fixed deposits was eligible for deduction u/s 80IA of the Act. It was accordingly submitted that the assessee earned interest on the TDS amount which otherwise would have been available to the assessee and which would have yielded business income. Therefore, interest refund is received in view of the business income and it is eligible for deduction u/s 80IE of the Act. 8. The ld DR is heard who has relied on the order of the lower authorities. It was further submitted by the ld. DR that the decision of the Hon ble Karnataka High Court is distinguishable on facts and not applicable in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt being that the only business of the undertaking is that of power generation and any income derived by the undertaking, including the interest income, can only be derived by the undertaking and it is not necessary for the undertaking to also show that the interest income is traceable to the undertaking. It is submitted that any income derived by the undertaking from the business of power generation is eligible for the deduction and the interest income falls under this category. It is also pointed out that the income-tax is paid by the undertaking and not the assessee. In contrast, the argument of the revenue is that the interest received by the assessee is on account of fixed deposits with bank and income-tax refund and these two items of income have nothing to do with the business of the undertaking, which is that of power generation and, therefore, the interest cannot be considered as profits derived by the undertaking from the eligible business. Both sides have drawn our attention to certain authorities which we shall refer at the appropriate stage. 10. It is necessary to notice that the interest income of ₹ 9,82,050 consists of the following : (a) Interest fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and sections 80HH(1) and 80HHA(1) on the other hand, in our opinion, does not make any difference to the position that the interest on income-tax refund cannot be assessed under the head Profits and gains of business . We are concerned only with the question whether the interest income derived by the undertaking can be considered as income derived by the said undertaking from the business of power generation. For this purpose, which is the relevant enquiry to be carried out under section 80-IA(1), it is not necessary to examine whether the difference in the phraseology between the aforesaid sub- section and sections 80HH(1) and 80HHA(1) would make any difference to the principle. Even in a case where the assessee contends that the interest on the income-tax refund is eligible for deduction under section 80HH or 80HHA, it would be relevant to examine whether the said interest can be considered as part of the profits and gains derived from an industrial undertaking or a small scale industrial undertaking. In all the three cases, it would be a necessary enquiry to find out if such interest can be considered as part of the profits and gains of the eligible business. Even if we are w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deducted to arrive at an estimate of the profits on which income-tax is to be assessed. These decisions have been referred to by the Patna High Court in the Province of Bihar v. Rai Shambulal Bose [1947] 15 ITR 176. In this case, Hon ble Justice Manohar Lall, speaking for a Division Bench of the Court stated the law as follows : On general principles and in accordance with the practice which prevails in England, it is well-settled that income-tax paid by an assessee cannot be allowed to be deducted out of the assessable income. The reason for this practice is that income-tax is a share of the Crown in the income of the assessee and cannot be treated as an expenditure necessary to earn that income. In Smt. Padmavathi Jaikrishna v. Addl. CIT [1987] 166 ITR 1761 , the Supreme Court observed as under at page 179 : We are inclined to agree with the High Court that so far as meeting the liability of income-tax and wealth-tax is concerned, it was indeed a personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively for the purpose of earning income. These observations were made with reference to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court judgments in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (Mad.), T.N.K. Govindraju Chetty v. CIT [1967] 66 ITR 465 (SC) and Chandroji Rao v. CIT [1970] 77 ITR 743 (SC) and that it was never the case of the assessee that the interest partook the character of profits of the business. It is submitted that the case has to be understood in the light of the controversy for decision which was only whether the interest was capital receipt. It was further submitted that though at page 321, the Madras High Court held that the interest may not be an income arising from an activity , business or investment, it would come under the head Other sources , these observations have to be understood only in the context of the precise controversy which was before the Court. While it may be true that the judgment of the Madras High Court (supra) did not deal with the precise controversy that has arisen for decision before us and the observations made therein have to be understood only to the extent that the interest received on income-tax refund would fall to be considered under the head Income from other sources and where a contention is advanced that such interest having arisen beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the tax on the income cannot be allowed as a deduction. As regards the claim under section 36(1)(iii), it was claimed by the assessee that this was an expense incurred wholly and exclusively for the purpose of the business and was incurred for the purpose of preserving and protecting the assessee s business since otherwise, it was contended, the assets of the business would have been open to recovery action by the income-tax authorities. The Supreme Court rejected the plea based on section 37 on the ground that the interest payment was not in any way connected to the assessee s business or incurred wholly and exclusively for the purpose of the business. It was observed that the tax is payable on the assessee s income after the income is determined and, therefore, the interest cannot be considered as expenditure for the purpose of earning the profits. This judgment also shows that payment of tax or interest on monies borrowed for payment of tax has not been viewed as something connected to the business operations of the assessee and the Courts have been inclined to take the view that payment of tax is a personal obligation not connected with the business. The deployment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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