The Commissioner Of Income Tax Tamil Nadu I Madras v. M/S.tribalogy India Limited

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 01.11.2010 Coram : THE HONOURABLE MR.JUSTICE F.M.IBRAHIM KALIFULLAandTHE HONOURABLE MR.JUSTICE N.KIRUBAKARAN T.C.(A) Nos.454 to 456/2004 The Commissioner of Income TaxTamil Nadu I Madras.... appellantvs. M/s.Tribalogy India Limited.,No.1, Smith Road, Chennai 600 002.... Respondent Prayer :- Appeal presented against the Income Tax Appellate Tribunal"C" Bench, Chennai, dated 17.07.2003 passed in I.T.A.Nos.1518 to1520/MDS/1995. Against the order of the Commissioner of Income TaxAppeal-IV, in ITA No.318 to 320/93-94, dated 28.10.1994, against theAssessment order of Assistant Commissioner CO. Cir, IV (5), Madras-6,dated 29.3.1993 in PAW/GIR No.47066 CX 4637, PAW GI No.118-T/47066 CX4637, respectively. For petitioner : Mr.T.Ravikumar For respondent : No appearanceJ U D G M E N T Though notice was duly served on the respondent by way ofsubstituted service, there is no representation either in person orthrough counsel. We therefore, proceed to decide the appeals onmerits.2.The substantial questions of law raised in these appeals readas under:- "(1)Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas right in law in holding that the earning ofinterest income from Bank deposits will have tobe treated as business income ?(2)Whether on the facts and in thecircumstances of the case, the Tribunal isjustified in law in holding that there was nexus https://hcservices.ecourts.gov.in/hcservices/ between the deposits made and the business andtherefore, interest earned on the deposits waspart of the industrial undertaking ?" 3.The revenue has come forward with these appeals. Challenge isto the order of the Appellate Tribunal "C" Bench, Chennai dated17.07.2003 passed in I.T.A.Nos.1518 to 1520/1995. Assessment yearsare 1989-90; 1990-91; 1991-92. 4.Brief facts which are required to dispose of these appealscould be briefly stated as under :- Respondent is a Company engaged in the manufacture ofChimney and Furnace. The assessee claimed that interest income earnedfrom certain deposits made with Fidelity Company by way of fixeddeposit towards security should be treated as income derived from itsindustrial undertaking. On that basis, respondent assessee claimedthe benefit as provided under Section 80 I of the Income Tax Act. TheAssessing Authority treated such interest income as "from othersource" and that the same cannot be treated as "part of businessincome". The respondent preferred an appeal and the CIT Appeal upheldthe contention of the respondent/assessee and directed the AssessingOfficer to re-compute the reduction under Section 80 I, treating theinterest receipt as part of the business income. The Tribunal havingconfirmed the said view of the CIT Appeals, Revenue has come forwardwith this appeal. 5.We heard Mr.Ravi Kumar, learned Senior Standing Counsel forthe appellant. The learned counsel after drawing our attention toSection 80 I, pointed out that inasmuch as the deposits made by theappellant and the interest income earned by it has absolutely norelation to its manufacturing activity of Chimney and Furnace, thesaid interest income can only be construed as income from othersources and not as income derived from the industrial undertaking. Insupport of his submission, the learned counsel placed reliance uponthe decision of Division Bench of this Court reported in 233 [98] ITR497, Commissioner of Income tax vs. Pandian Chemicals Ltd. It wasalso confirmed by the Supreme Court in the decision reported in 262(2003) ITR 278 [Pandian Chemicals Ltd. vs. CIT] and a recent decisionof the Hon'ble Supreme Court reported in 2009 (3) ITR 218 [LibertyIndia vs. C.I.T.]. 6.To appreciate the contention of the learned Standing Counsel,we deem it fit and proper to extract the relevant part of the abovereferred to decisions. In 233 [98] ITR 497 at page 506, the DivisionBench has stated the legal position as regards the expression"derived from" in the following words :-"A study of various case laws clearly indicatesthat a restricted meaning is given when the Legislatureuses the expression "derived from". Though the assesseehas necessarily to make the deposit with theElectricity Board for running the industry and thepower supply will not be made without the deposit in https://hcservices.ecourts.gov.in/hcservices/ favour of the Electricity Board, the income derivedfrom the deposit with the Electricity Board cannot besaid to have been derived from the industrialundertaking. The immediate source of interest is thedeposit itself, and the effective source of thegenealogy of the source of the interest income is thedeposit and not business, as the industrial undertakingis removed by one step from the source of income forthe interest. Hence, the interest income cannot be heldto be derived from the industrial undertaking. In otherwords, the immediate and effective source of theinterest is the deposit and not the industrialundertaking." 7.In 262 (2003) ITR 278 [Pandian Chemicals Ltd. vs. CIT], whileconfirming the above view of the Division Bench, the Hon'ble SupremeCourt has held as under :- "This definition was approved and reiteratedin 1955 by a Constitution Bench of this Court inthe decision of Bacha F. Guzdar v. CIT, [1955] 27ITR 1. It is clear, therefore, that the words“derived from” in Section 80-HH of the Income TaxAct, 1961 must be understood as something whichhas direct or immediate nexus with theappellant’s industrial undertaking. Althoughelectricity may be required for the purposes ofthe industrial undertaking, the deposit requiredfor its supply is a step removed from thebusiness of the industrial undertaking. Thederivation of profits on the deposit made withthe Electricity Board cannot be said to flowdirectly from the industrial undertaking itself.The learned counsel appearing on behalf ofthe appellant has referred to several decisionsof the Madras High Court in order to contend thatthe words “derived from” could be construed toinclude situations where the income arose fromsomething having a close connection with theindustrial undertaking itself. All the decisionscited by the appellant have been considered bythe Madras High Court in the case of PandianChemicals Ltd. [1998 233 ITR 497[.] We see no reasonto disagree with the reasoning given by the HighCourt in Pandian Chemicals Ltd. [1998 233 ITR497. with respect to those decisions to hold thatthey do not in any way allow the word “derived”in Section 80-HH to be construed in the mannercontended by the appellant." 8.In the decision reported in Liberty India v. CIT [2009] 317ITR 218 SC, at page 233, paragraph 15, the Hon'ble Supreme Court heldas under :- "15.We may reiterate that Sections 80-I, 80-IA and 80-IB have a common scheme and if so readit is clear that the said sections provide forincentives in the form of deduction(s) which arelinked to profits and not to investment. 8.In the decision reported in Liberty India v. CIT [2009] 317ITR 218 SC, at page 233, paragraph 15, the Hon'ble Supreme Court heldas under :- "15.We may reiterate that Sections 80-I, 80-IA and 80-IB have a common scheme and if so readit is clear that the said sections provide forincentives in the form of deduction(s) which arelinked to profits and not to investment. On an analysis of Sections 80-IA and 80-IBit becomes clear that any industrial undertaking,which becomes eligible on satisfying sub-section(2), would be entitled to deduction under sub-section (1) only to the extent of profits derivedfrom such industrial undertaking after specifieddate(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum ofdeduction to a specified percentage of profits.This is the importance of the words “derived fromindustrial undertaking” as against “profitsattributable to industrial undertaking”.Hence, incentives profits are not profitsderived from the eligible business under Section80-IB. They belong to the category of ancillaryprofits of such undertakings." 9.A reading of the above principles laid down by the Hon'bleSupreme Court makes it clear that the expression "derived from"should be given a very strict and restricted meaning. The statementof law as declared by the Hon'ble Supreme Court to the effect thatSection 80-I of the Act and similar provisions provide for incentivesin the form of deductions which are linked to profits and notinvestment, makes the position clear that such income which isdirectly earned from and out of the business viz., as in the case onhand, manufacture of chimneys and furnace alone, would fall withinthe expression "derived from", as set out in the said provision.Since the Hon'ble Supreme Court has made it clear that there is aclear distinction between the terms "derived from and attributableto", the expression "derived from" has got to be given a very strictinterpretation relatable only to income derived from the business andnot to any other source of deposits made. It will have to be heldthat applying the said principles, the interest earned by therespondent from and out of Fixed Deposit cannot be brought under theexpression "derived from the industrial undertaking". 10.As held by our Division Bench in the decision reported in 233[98] ITR 497, Commissioner of Income tax vs. Pandian Chemicals Ltd.,when the immediate and effective source of interest is the depositand not the business of the respondent undertaking viz., themanufacture of chimneys and furnace, it will have to held that the respondent is not entitled to claim benefits as provided underSection 80-I of the Act. 11.The questions of law are therefore, answered in favour of theRevenue. The appeals stand allowed. The orders of the C.I.T. Appealsas well as that of the Tribunal is set aside. The order of theassessing authority stands restored. No costs. Sd/Asst.Registrar /true copy/ Sub Asst.Registrar tarTo 1. The Commissioner of Income TaxTamil Nadu I Madras.2. Assistant Commissioner, Co.Cir IV (5) Madras-63. The Commissioner of Income Tax (Appeals) IV,Madras-600 034 4. The Deputy Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan, Chennai-903 ccs To Mr.T.Ravikumar, Advocate, SR.78984 T.C.(A) Nos.454 to 456/2004 LA (CO)RH (30.11.10)