HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A No. 119 OF 2004
23-12-2014 BETWEEN The Commissioner of Income Tax, Tirupati …Appellant And M/s. Amararaja Batteries Ltd., Renigunta, Cuddapah Road, Karakambadi, Tirupati, Chittoor District …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A No. 119 OF 2004
JUDGMENT: (per the Hon'ble Sri Justice L. Narasimha Reddy)
The Revenue filed this appeal under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’) feeling aggrieved by the order passed by the Visakhapatnam Bench of the Income Tax Appellate Tribunal (for short, ‘the Tribunal’) in ITA No.322/Vizag/98. The dispute is referable to the assessment year 1996-97.
The respondent is a manufacturer of batteries and its factory and establishment is at Tirupati. Section 80-IA of the Act provides for 100% deduction of profits and gains of an industrial undertaking engaged in infrastructure development etc., for a period of ten years in a span of first 15 years from the date of establishment. In its returns filed for the assessment year 1996-97, the respondent claimed deduction of the income derived from its activities. One of the components was Rs.15,09,267/- in the form of interest earned on the deposits made for the purpose of obtaining letters of credit. The assessing officer did not allow deduction by taking the view that it cannot be said to be income derived from the activity. The respondent filed an appeal before the Commissioner of Income Tax (Appeals-I), Hyderabad. The appeal was allowed through order dated 26-03-1988. The order of Commissioner was challenged by the department by filing ITA No.322/Vizag/98 and the appeal was dismissed through order dated 29-05-2003. Hence, this appeal.
Smt. Kiranmayee, learned Junior Standing Counsel assisting Sri J.V. Prasad, learned Standing Counsel for the Revenue submits that the amount would qualify for deduction under Section 80-IA of the Act only when it is derived from the activity mentioned therein. She contends that the making of deposits cannot be said to be an activity of providing infrastructure or others mentioned therein, much less, the interest derived therefrom can be treated as the once covered by the provision. She has placed reliance upon the judgment i n CIT vs. Sterling Foods and pleaded that the view taken by the Commissioner and the Tribunal cannot be sustained in law.
None appeared for the respondent.
Even while making extensive provisions for levy of income tax, the Parliament incorporated Chapter VI-A as a measure of incentive to entrepreneurs. The incentives are of different categories. In some cases, it is in the form of deduction of profits up to certain percentage and in other cases, it is almost in the form of tax holiday. Section 80-IA of the Act belongs to the latter category. It provides for deduction to the extent of 100% of the profits derived from the categories of business mentioned therein for such period as is provided for under sub-section (6). Sub-section (1) of Section 80-IA of the Act reads as under:
“80-IA (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship (such business being hereinafter referred to as the eligible business), 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 the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6).
(remaining part of the section is omitted)”
That the activity undertaken by the respondent was covered by sub- section (2) of Section 80-IA as it stood then, is beyond any pale of doubt. The only controversy is as to whether the interest paid to the respondent on the deposits made by it for procuring the letters of credit can be treated as the profit and gain derived from the business referred to in sub-section (2).
The words “derived from” were interpreted in quite a large number of judgments by the Supreme Court and various High Courts. In the recent part, we dealt with this very aspect in ITTA Nos.211 and 242 of 2003 dated 15-10-2004 and ITTA No. 214 of 2003 of the same date. The judgment of the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh and that of the Supreme Court in Commissioner of Income Tax vs. Govinda Choudhury and sons were taken note of and we made the following observation:
“The income of a manufacturer of a particular item is mostly in the form of the receipt of sale consideration. What constitutes consideration, is not susceptible of any precise definition. Though on a strict financial discipline, one may determine the cost of the product by taking into account the factors such as the cost of raw-material, the cost of manufacture (which may take in its fold, the expenditure incurred towards establishment and power and wages to workers), the component of taxes and the margin of profit. Many a time, several external factors influence the determination of price, requiring upward or downward revision. For instance, if the cost of the product is determined on scientific lines to be at Rs.1000/- per unit, all surrounding circumstances being normal, the manufacturer may sell it at the same price. However, if there is slump in demand, an occasion may arise to offer discount on it, in which case, the price may stand reduced. Conversely, if the demand is heavy and the supply is less, a premium may accrue to the product and depending upon the financial status and discipline of the manufacturer or trader, the product may be sold at a phenomenally higher price.”
In the other judgment, we distinguished the judgment of the Supreme Court in Commissioner of Income Tax vs. Pandian Chemicals Ltd., on the facts of the case. The ultimate test would be as to whether the link between the income on the one hand and the activity referable to the relevant provision on the other hand can be established in the answer to the very first query itself. We find no difficulty to expect such an answer in the instant case.
An industry or a manufacturer may make variety of deposits or may borrow loans. While on the deposits it earns interest, on the borrowings it has to pay interest. What qualifies for deduction, is interest on the income derived from deposits which is directly referable to the activity covered by a particular section. If there is proximity between the two, the deduction becomes available and if it is remote, it would not be. For example, a manufacturing assessee may be under obligation to obtain letters of credit as a part of its activity. Many a time, the process of obtaining letters of credit involves making of deposits and the deposits in turn would yield interest. The same assessee can make the intercorporate deposits if it is in excess of resources and interest can be derived from such deposits also. While the former can be said to be in proximity to the activity of the assessee, the latter is remote. In a way, the test that can be applied in this behalf is as to whether the making of deposits is dependent upon,or for the purpose of industry. In still narrower form, the question would be as to whether the activity of the assessee could have been carried on without making such deposits. If the answer is in the negative, the interest qualifies for deduction and if it is in the affirmative, it would not be.
The letters of credit, wherever they are necessary for an industry to undertake the activity, would become concomitant part of the entire business and obviously for that reason, the interest if any derived on the deposits would qualify for deduction.
Another way of looking it is as to whether the income in the form of interest on deposits is assessed as income from other sources or from business. It is only when such income is treated as from other sources that it would not qualify for deduction. If on the other hand, it is treated as the one from business, the assessee becomes entitled for deduction. Here again a word of caution needs to be added. If the assessee has more kinds of business than one, the concerned income must be referable to the business which is covered by the relevant provision under Chapter VI-A of the Act.
The judgment of the Supreme Court in Sterling Foods’ case (1 supra) dealt with a totally different aspect of the matter altogether. That was a case in which the sale proceeds of import entitlements was sought to be treated as the income derived from the activity of manufacturing. The Supreme Court took the view that such a plea cannot be accepted. The facts of the present case are radically different from those of that case.
In the instant case, the Tribunal, on the analysis of the record found that the interest on deposits made for procuring the letters of credit was treated as the one from the business referable to Section 80-IA of the Act and not the one from other sources. With those facts, the inevitable conclusion is that the income is qualified for the deduction under Section 80-IA of the Act and the Tribunal has taken the correct view of the matter. The finding recorded by the Tribunal in that behalf is not even challenged.
The appeal is accordingly dismissed. There shall be no order as to costs.
L. NARASIMHA REDDY, J CHALLA KODANDA RAM, J 23-12-2014 ks Note:
LR Copy to be marked.
B/O ks