TMI Blog2000 (12) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... duction. The assessment for asst. yr. 1995-96 was reopened by issuing notice under s. 148 of the IT Act in March 1998. Thereafter, the reassessment was made. The claim in other assessment year was rejected in the regular assessment proceedings. 2. The assessee-company in the relevant period was engaged in manufacture of electric lighting and fitting accessories. The lone customer of the assessee was Bajaj Electricals Ltd. There is no dispute that assessee is eligible for deduction under s. 80-IA of the IT Act on manufacturing activities carried on by the assessee. 2.1. That as per the contract embedded in invoice M/s Bajaj Electricals Ltd. was supposed to make payment on sale consideration within a stipulated time and in case of delay, it was liable to compensate the appellant-company by payment of interest at the rate of 18 per cent per annum on the outstanding bills for the period of delay. 2.2. The AO was of the view that for claiming deduction under s. 80-IA of the IT Act, the gross total income of the assessee should include any profit and gains "derived from" any industrial undertakings which manufacture or produce article or a thing. In other words, the income should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned the above assessment in appeal before the learned CIT(A) who upheld the orders of the AO through a consolidated order dt. 20th Aug., 2000. The learned CIT(A) also mainly relied upon the decisions noted by the AO. The reasoning given by the learned CIT(A) for agreeing with the AO are summarised as under: "1.3 I have considered the facts and the merits of the case. Admittedly, the provisions of ss. 80-I and 80-IA are different. It is also an admitted fact that the interest has been earned on the late receipt of sale proceeds. There is no direct nexus between the manufacturing activities and the receipt of interest. The deduction under s. 80-IA is allowable from income derived from manufacturing activities. For carrying on production and selling the goods, earning of such interest is not relevant at all. The provisions of s. 80-IA are different from the provisions of s. 80-I. The decision in the case of M/s Arthi Organics Ltd. was given in respect of relief allowable under s. 80I. This decision is not applicable to the facts of the case of the appellant. On going through the decision of Hon'ble Supreme Court in the case of M/s Sterling Foods and Hindustan Lever Ltd. I find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 881 (SC). The said decision has further been followed by Hon'ble Kerala High Court in the case of United Construction Contractors vs. CIT (1994) 119 CTR (Ker) 39 : (1994) 208 ITR 914 (Ker). The learned counsel for the assessee further placed on record the following decisions of different High Courts and of Tribunal: (i) CIT vs. Buckau Wolf New India Engg. Works Ltd. (1983) 36 CTR (Bom) 412 : (1984) 150 ITR 180 (Bom); (ii) Asstt. CIT vs. Buckau Wolf New India Engg. Works Ltd. (1985) 46 CTR (Bom) 200 : (1986) 157 ITR 751 (Bom); (iii) CIT vs. Buckau Wolf New India Engg. Works Ltd. (1991) 187 ITR 464 (Bom); (iv) Dy. CIT vs. M/s Mira Industries (ITA No. 3314/Ahd/1997); (v) Dy. CIT vs. Arti Organics Ltd. (ITA No. 1888/Ahd/93); (vi) Ratnamani Metals Tubes Ltd. vs. Dy. CIT (ITA No. 4484/Ahd/94); and (vii) CIT vs. Rane (Madras) Ltd. 5. The learned Departmental Representative opposed above submissions and reiterated that interest received on delayed payment of sale consideration was not "income derived" from manufacturing activities. He also relied upon the two decisions of Hon'ble Supreme Court cited in the assessment order and referred to above. 6. After the hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of that profit and not a means to earn any other profit. Reference was also made to the meaning of the word "source", and it was held that the import entitlements that the assessee had earned were awarded by the Central Government under the scheme to encourage exports. The source referable to the profits and gains arising out of the sale proceeds of the import entitlement was, therefore, the scheme of the Central Government and not the industrial undertaking of the assessee. We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrears is not such a payment. It is not part of the rent, nor is it an accretion to it though it is received in respect of it. Equally clearly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent-and rent is obviously derived from land-three could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All that emerges is that as regards the interest, land rent and non-payment of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained. 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 the genealogical tree of the interest land indeed appears in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Not much controversy was raised about question No. 1 and arguments were advanced on question No. 2. The Hon'ble Supreme Court treated the interest amount as part of contract receipts with the following observations: "The brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed as under: "The manufacture of machinery by the assessee is a priority industry. The carrying out of repairs to machinery manufactured and sold by the assessee is an activity which has a direct nexus to the priority industry. The income derived therefrom must, therefore, be held to be attributable to the priority industry. The income derived from the interest paid by buyers of machinery manufactured by the assessee on deferred payment also has direct nexus to the assessee's priority industry and is attributable to it. The facility of after-sales repairs and of deferred payment are inducements offered to intending purchasers and are intimately linked to the assessee's priority industry." (4) CIT vs. Buckau Wolf New India Engg. Works Ltd. In that case, one of the questions referred to the Hon'ble Bombay High Court was as under: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from interest received from customers of Rs. 37,106 and machining charges amounting to Rs. 9,345 is liable to be deducted for the purpose of giving relief under s. 80E of the IT Act, 1961?" Their Lordships after following de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit and gain of the business of the undertaking and there is no warrant to stop for the above purpose at sale only. The controversy here is not when manufacturing activity of the assessee was over, but what was the profit and gain of the business of the undertaking and how was it to be determined. For determining above profit of business it is not possible to ignore sale and the terms and conditions on which it has been effected. The charging of interest on the delayed payment is a term of the agreement of sale of the article manufactured by the industrial undertaking. 7.7. We are fully conscious that Hon'ble Supreme Court since its decision in Cambay Electric Supply Industrial Co. vs. CIT emphasised on the distinction between the words "derived from" and "attributable to" and held that latter to be words of much wider import. The words "derived from" were held to be used by the legislature where it wanted that income should have a direct nexus with the activities of the priority industry. In the present case we are dealing with words "derived from" and, therefore, to get relief under s. 80-IA, the claim of profits must have a direct nexus with the activity of the industrial un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this decision to a catena of authorities taking the above view including the decision of Hon'ble Supreme Court in he case of CIT vs. Govinda Choudhary Sons. 7.11. In the present case, there is no dispute that interest is paid on delayed payment of sale consideration as per agreement between the parties. It is a term and condition of the sale that a higher amount would be paid in case there is delay in the payment of sale consideration. The fact that this extra amount of sale consideration is described as "interest" and is calculated at a fixed rate with regard to the period does not make any difference to its character as sale consideration. 7.12. The assessee could have entered into contract of sale of goods with Bajaj Electricals Ltd. in the following two manners: (a) By providing that interest at the rate of 1 per cent per month would be charged on the unpaid sale price and added to same for realisation. In that case, on sale of goods worth Rs. 100 the assessment would realise Rs. 102, Rs. 104, Rs. 106, after delay of 1,2 and 3 months. (b) Alternatively, the contract could provide that in case of delay of one, two or three months in the payment of sale of goods worth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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