Section 80-IC deduction unavailable on fixed deposit interest–High Court

Section 80-IC deduction unavailable on fixed deposit interest–High Court. The  benefit is available only for carrying on business mentioned in sub-section (2) and profits and gains derived therefrom.

ABCAUS Case Law Citation:
ABCAUS 2131 (2017) (11) HC

The Challenge/Grievance:
The appellant assessee was aggrieved by the judgment and order of the Tribunal (ITAT) dismissing the appeal of the assessee challenging the revisionary order passed by the Commissioner of Income Tax (CIT) under section 263 the Income Tax Act, 1961 (the Act) whereby the benefit of deduction u/s 80IC of the Act was denied to the assessee so far as it related to interest on fixed deposits.

Important Case Laws Cited/relied upon by the parties:
Cambay Electrical Supply Co. Ltd. vs. Commissioner of Income Tax 1978 (113) ITR 84
Pandian Chemicals Ltd. vs. Commissioner of Income Tax (2003) 262 ITR 278 (SC)
Commissioner of Income Tax vs. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC).
Commissioner of Income Tax vs. Jaypee DSC Ventures Ltd. (2011) 335 ITR 132.
Commissioner of Income Tax vs ELTEK SGS (P) Ltd. (2008) 300 ITR 6 (Del).
Commissioner of Income Tax vs. Jagdish Prasad M. Joshi (2009) 318 ITR 420 (Bom)

Brief Facts of the Case:
The assessee was an undertaking, which manufactured electric meters. It claimed the benefit of Section 80-IC of the Act. It was noted that during the relevant assessment year, the assessee had earned interest income on fixed deposits, which had to maintained with banker  for the purposes of issuing of Performance Bank Guarantee. However, the entire amount of the net profit for the relevant assessment year was allowed as deduction under Section 80-IC of the Act. The Commissioner of Income Tax (CIT) initiated proceedings under Section 263 of the Act.

The CIT observed that in view of the judgments of the Hon’ble Apex Court, there is a distinction between the words “derived from” and “attributable to”. Insofar as Section 80-IC is concerned, the words used are not “attributable to”, but “derived from”. The CIT took the view that the Assessing Officer (AO) was incorrect in including the same for the purpose of computing deduction under Section 80-IC of the Act. Hence, the assessment was cancelled under Section 263 of the Act and it was to be done afresh after taking all aspects discussed into the consideration.

Against the revisionary order of the CIT passed under section 263, the appellant preferred an Appeal before the Tribunal, which was by the impugned order dismissed by the ITAT.

The Substantial Questions of Law framed/pressed for determination:
“Whether the Ld. ITAT is correct in law in rejecting the appeal ignoring the fact that the amount earned from the FDR kept as security and as a business pre-requisite are deductible u/s 80 IC of the I.T. Act 1961?”

Observations made by the High Court:
The High Court analysed the various decisions relied upon by the appellant and found them distinguished and not applicable to the facts of the case.

The High Court observed that in a case related to deduction u/s 80HHC and relied upon by the Revenue, the assessee had earned interest on deposits, which it had made with the State Electricity Board. The Hon’ble Supreme Court held that the word “derived from” in Section 80HH of the Act, must be understood as something which had direct or immediate nexus with the appellant’s industrial undertaking. Although electricity might be required for the purposes of the industrial undertaking, the deposit required for its supply was a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board could not be said to flow directly from the industrial undertaking itself.

In the said case, the Hon’ble Supreme Court clarified that the rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation.

The High Court opined that the said decision of the Apex Court was applicable in the facts of the instant case as the language, which is employed in Section 80HH is similar to the language used in Section 80-IC.

The High Court observed that both in Sections 80HH and 80-IC, the Legislature has chosen to employ the word “derived” as distinguished from “attributable to”. Had the Legislature used the words “attributable to”, then it would have a much wider effect and it may have encompassed within itself, the income, which is the subject matter of controversy. But insofar as a narrow concept has been contemplated by the Legislature for the purpose of grant of benefit of deduction under Section 80-IC,  the interest earned had nothing to do with carrying on of the business per se, namely, manufacture and sale of the articles in question. Therefore, the appellant would not be entitled to the benefit of deduction.

The High Court clarified that any income, which may be derived from carrying on the business, even if it is incidental, would qualify as business income under Section 28, but that is not the samething as saying that it is a business income, which is derived from the said business.

The High Court held that under Section 80-IC, a person, an enterprise or an undertaking is entitled to take the benefit of Section 80-IC only insofar as it carries on business, which is mentioned in sub-section (2) of Section 80-IC and derives profits and gains therefrom.

Decision/ Conclusion/Held:
Question of law was answered against the assessee and in favour of the Revenue. Appeals were rejected.