(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These appeals arise out of a common judgment of the Income Tax Appellate Tribunal ('Tribunal' for short) dated 1.3.2000. In Tax Appeal No.256 of 2000, for the assessment year 1990-91, following two substantial questions of law were framed while admitting the appeal :
“1. Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer not to exclude interest income for the purpose of computing the deduction u/s 32AB of the Act?
2. Whether the Appellate Tribunal is right in law and on facts in directing to allow separate relief u/s 80HHA and 80I of the Act?”
In Tax Appeal No.257 of 2000, for the assessment year, 1989-90, following substantial question of law was framed :
“1. Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer not to exclude interest income for the purpose of computing the deduction u/s 32AB of the Act?”
2. Insofar as question No.2 in Tax Appeal No.256 is concerned, counsel for the Revenue candidly stated that such issue is concluded against the Revenue by virtue of the judgment of the Apex Court in the case of Joint Commissioner of Income Tax v. Mandideep Eng. & Pkg. Ind. P. Ltd., (2007) 292 ITR 1 (SC). This appeal was ordered to be heard with Tax Appeal No.99/99 in which also similar question was framed. Such appeal came to be dismissed by a Division Bench of this Court by order dated 16.6.2011. Under the circumstances, question No.2 is answered in the affirmative against the Revenue and in favour of the respondent-assessee.
3. This leaves us with the sole surviving question arising in both the Tax Appeals. For the purpose of considering such question, we may record the facts as emerging in Tax Appeal No.257 of 2000.
4. The respondent-assessee is engaged in the business of production and sale of chloral, spent sulphuric acid, chloroform, etc. During the previous year relevant to assessment year 1989-90, the assessee claimed deduction under section 32AB of the Act contending that a sum of Rs.12,49,427/- was utilized for the purchase of machinery out of the profits and gains of business and profession and a sum of Rs.3,30,000/- was deposited in its account in the Development Bank. The Assessing Officer though accepted such figures, noticed that for working out the limit of deduction under section 32AB of the Act, the assessee had also claimed interest income forming part of the profits from eligible business. The Assessing Officer was of the opinion that such interest income must be treated under the head of income from other sources and therefore, cannot form part of the income from eligible business for ascertaining the limit of deduction eligible under section 32AB of the Act. He accordingly, reworked out deduction under section 32AB of the Act on such basis.
5. The assessee carried the issue in appeal before the Commissioner (Appeals). Before the Commissioner, the assessee pointed out that major portion of the interest was received from two financial institutions which had insisted for keeping the business deposits on which the assessee had been granted interest at the rate of 12%. It was because of this insistence by the financial institutions to keep such deposits that the Company had parked certain funds as business deposits. These funds were employed by making advances at a higher rate. It was contended that the funds were kept pursuant to the directions of the financial institutions and were thus only part of the business dealing. The business of the Company was to manufacture chemical products and to sell the same. The income so generated was also utilized for purchase of chemical equipments. It was thus the contention of the assessee that the income was business income and not income from other sources.
6. The Commissioner accepted the assessee's contention. He was of the opinion that interest earned by the assessee should form part of the business income and should, therefore, be part of the eligible income of the assessee upon which the limit of deduction under section 32AB of the Act should be worked out.
7. The Revenue carried the matter before the Tribunal. The Tribunal dismissed the Revenue's appeal. The Tribunal relied on a decision of the Kerala High Court in the case of C.I.T. v. Appollo Tyres Ltd.
237 ITR 706 (Ker.) in preference to the decision in the case of C.I.T. v. Dinjoye Tea Estate (P) Ltd., 224 ITR 263 (Gauhati) which was in favour of the Revenue. It is this decision of the Tribunal which the Revenue has challenged before us.
8. Learned counsel for the Revenue candidly pointed out that decision of the Kerala High Court in the case of Appollo Tyres Ltd (supra) was confirmed by the Apex Court in the decision reported in 255 ITR 237(SC). She, however, submitted that the issue involved in the present case was somewhat different from that which came up for consideration before the Kerala High Court. She pointed out that in the case before the Kerala High Court, it was held that one of the businesses of the assessee was to deal in UTI shares. On that basis income generated from such business was treated as part of the eligible business under section 32AB of the Act. She contended that in the present case, the assessee was not engaged in the business of earning interest. She relied on the decision of the Apex Court in the case of Pandian Chemicals Ltd. v. C.I.T, 262 ITR 278 (S.C.).
9. Though served no one appears for the respondent.
10. Before dealing with the contentions, we may notice the relevant provisions of section 32AB of the Act prevailing at the relevant time, which read as under:
“32AB.(1) Subject to the other provisions of this section, where an assessee whose total income includes income chargeable to tax under the head “Profits and gains of business or profession”, has out of such income -
(a) deposited any amount in an account (hereafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or
(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a), in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board , the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of --
(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilized; or
(ii) a sum equal to twenty per cent of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section(5), whichever is less:
Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member of such firm, association of persons or body of individuals:
Provided further that no such deduction shall be allowed in relation to the assessment year commencing on the 1st day of April 1991 or any subsequent assessment year.
(2) For the purpose of this section --
(i) “eligible business or profession” shall mean business or profession, other than -
(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking which is not a small-scale industrial undertaking as defined in section 80HHA.
(b) the business of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.
. ”
11. Upon perusal of the above provisions, it emerges that if an assessee deposits any amount in an account maintained by him in the Development Bank within the time specified, out of the income chargeable to tax under the head of profits and gains of business or profession or utilizes such amount for the purchase of any new ship, new aircraft, new machinery or plant, he would be entitled to deduction as specified in sub-section (1) of section 32AB of the Act. Such deduction would be a sum equal to the amount or the aggregate of the amounts, so deposited and any amount so utilized or a sum equal to twenty per cent of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less. In is in this context, to ascertain the assessee's ceiling for the deduction under section 32AB of the Act, computation of profit of eligible business or profession assumes significance. Revenue contends that while computing this figure, the assessee's interest income should be excluded.
12. We may notice that the Kerala High Court in the case of Appollo Tyres Ltd. (supra) referring to CBDT circular No.461 dated 9th July 1986 observed that benefit under section 32AB of the Act will be available to all business income from whatever sources other than those mentioned in sub-clause (a) and (b) of clause (i) of sub-section (2) of the said section. It was observed that sub-section (1) of section 35AB consists of two parts. One is regarding utilization of income from business and the other is regarding deduction available on the utilization of such income. Utilization of income in order to qualify for deduction must be out of the income chargeable to tax under the head “profits and gains of business or profession”, whereas when it comes to deduction part, the same is an amount equal to 20% of the profits of the eligible business. We are conscious that in the said decision, the High Court upheld the Tribunal's finding that income from UTI shares was part of the assessee's eligible business.
13. In the present case, the assessee's stand has consistently been that due to insistence of the financial institutions, the assessee was compelled to park certain amount in fixed deposits from which it earned interest of 12 per cent, whereas the market rent at the relevant time was higher. Such interest income was utilized for the purpose of assessee's business by purchasing new machinery. In short, the assessee contended that such income cannot be treated as income from other sources, but must be seen as part of the assessee's business income.
14. In a recent decision in the case of C.I.T.
v. Jaypee DSC Ventures Ltd. (2011) 335 ITR 132 (Delhi), the Delhi High Court taking stock of various decisions of the Apex Court, namely, Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT, (1997) 227 ITR 172 (SC), CIT v. Bokaro Steel Ltd., (1999) 236 ITR 315 (SC), CIT v. Karnal Co-operative Sugar Mills Ltd., (2000) 243 ITR 2(SC), Bongaigaon Refinery and Petrochemicals Ltd v. CIT, (2001) 251 ITR 329 (SC), etc. held that income earned by the assessee from fixed deposit placed as part of performance guarantee, which was a condition for being awarded a contract must be treated as business income and not income from other sources. It was held as under :
“Keeping in view the aforesaid pronouncements in the field, the present controversy is to be adjudged. As is noticeable from the stipulations in the agreement, the performance guarantee by way of bank guarantee was required for faithful performance of its obligations. The non- submission of the guarantee would have entailed termination of the agreement and NHAI would have been at liberty to appropriate the bid security. That apart, the release of such performance security depended upon certain conditions. Thus, it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering into the contract and further it was to be kept alive to fulfill the obligations. Quite apart from the above, the release of the same was dependent on the satisfaction of certain conditions. Thus, the present case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest; on the contrary, the amount of interest was earned from fixed deposits which were kept in the bank for furnishing the bank guarantee. It had an inextricable nexus with securing the contract. Therefore, we are disposed to think that the factual matrix is covered by the decisions rendered in Bokara Steel Ltd. (1999) 236 ITR 315 (SC), Karnal Cooperative Sugar Mills ltd. (2000) 243 ITR 2 (SC) and Koshika Telecom Ltd. (2006) 287 ITR 479 (Delhi) and, accordingly, we hold that the view expressed by the Tribunal cannot be found fault with.”
15. In view of the exercise already undertaken by the Delhi High Court in the case of Jaypee DSC Ventures Ltd (supra), we may not separately refer to in detail the facts and ratio of the various decisions of the Supreme Court, noted above. Suffice it to conclude, in the present case also, the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions. On such funds, the assessee received interest. Such income cannot be treated as income from other sources and must be seen as part of the assessee's business of manufacturing and selling of chemicals. The decision of the Apex Court in the case of Pandian Chemicals Ltd. (supra) would not be applicable. In the said case, the Apex Court was interpreting the phrase 'derived from' used in section 80HH of the Act. It was in this background that the Apex Court held that the words 'derived from' must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. It was on that basis that the Apex Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking.
16. Before concluding, we may notice that clause (i) of sub-section (2) of section 32AB defines eligible business or profession to mean business or profession other than those specified in sub-clauses
(a) and (b) of clause (i) of section 32AB(2). Admittedly, the present case is not in either of the exclusionary clauses. Under the circumstances, we are of the opinion that the Tribunal committed no error.
17. In the result, question is answered in the affirmative, against the revenue and in favour of the respondent-assessee. Both the Tax Appeals are dismissed accordingly.
(Akil Kureshi, J.) (Harsha Devani, J.) (vjn)