ORDER
B.L. Chhibber, A.M.
August, 2001
1. Four grounds have been raised in this appeal by the assessee, besides an additional ground. The same are discussed and disposed of as follows.
2. Ground Nos. 1 and 2 read as under :
“(1) On the facts and in the circumstances of the case, the learned CIT(A) has erred in law and on merit in not taking into account gross or net interest on fixed deposits with banks in the computation of deduction under Section 80-IA.
(2) On the facts and in the circumstances of the case, and even assuming that interest on fixed deposits with banks was not to be taken into account in computing deduction under Section 80-IA, what should not have been taken into account is net interest and not gross interest.”
A similar issue came up before us in cross-objection No. 14/Pn/94 filed by the assessee relating to the asst. yr. 1991-92 and we restored this issue to the file of the AO as per our observations in para 6 of the said order. Following the aforesaid order, we restore this issue to the file of the AO and direct him to follow our directions in our aforesaid order and readjudicate upon the issue.
3. Ground No. 3 reads as under :
“On the facts and in the circumstances of the case, the learned CIT(A) has erred in law and on merit in not accepting the valuation of closing stock as done by the assessee and in revaluing the same.
At the time of hearing, this ground was not pressed. The same is accordingly dismissed.
4. Ground No. 4 reads as under :
“Any other ground that the appellant may raise at the time of the hearing of the appeal.”
Obviously, this ground is general in nature and calls for no comments.
5. Vide letter dt. 29th June, 2001, the assessee raised the following two additional grounds:
“(1) On the facts and in the circumstances of the case and in law and in the absence of any specific mention of the assessing authority in the assessment order charging interest under Section 234B no interest could be recovered from the assessee merely by way of demand notice as held by the Hon’ble Supreme Court in the case of CIT and Ors. v. Ranchi Club Ltd. the report copy of which was received on 20th Dec., 2000, that is, after the filing of the said appeal. This part of the judgment of the Hon’ble Supreme Court has not been nullified either by the retrospective amendment introduced by the Finance Act, 2001, nor by promulgamation of Central Ordinance.
(2) On the facts and in the circumstances of the case and in law the additional ground raised involves substantial question of law in view of Hon’ble Supreme Court judgment in the case Ranchi Club Ltd. (supra) and in view of Hon’ble Supreme Court judgment in the case of National Thermal Power Co. Ltd. v. CIT (1998) 97 Taxman 358 (SC) can be raised before any appellate forum though not raised earlier.”
After hearing both the parties and in view of the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 97 Taxman 358 (SC), we admit the additional grounds.
6. Shri M.K. Kulkarni, the learned counsel for the assessee, drew our attention to the assessment order and submitted, that in the assessment order the AO did not order charging of interest under Section 234B and hence, no interest could be recovered from the assessee merely by way of demand notice as held by the Hon’ble Supreme Court in the case of CIT and Ors. v. Ranchi Club Ltd. (2001) 247 ITR 209 (SC).
7. Shri P.V. Kulkarni, the learned Departmental Representative submitted that the judgment of the Hon’ble Supreme Court in the case of Ranchi Club Ltd. (supra) is a brief judgment of two lines and further that Sections 234A and 234B have been amended with retrospective effect by the Finance Act, 2001, and the ratio of the judgment of the Hon’ble Supreme Court stands nullified by the aforesaid amendment.
8. We have considered the rival submissions and perused the facts on record. No doubt, the judgment of the Hon’ble Supreme Court in the case of Ranchi Club Ltd. (supra) is a brief one, but it has affirmed the earlier two judgments of the Patna High Court, i.e., Ranchi Club Ltd. v. CIT and Ors. (1996) 217 ITR 72 (Pat) and Uday Mistanna Bhandar & Complex v. CIT and Ors. (1996) 222 ITR 44 (Pat). In the above two judgments, the Hon’ble Patna High Court have laid down the following two principles :
(1) Interest under Sections 234A and 234B is levied on the tax on the total income as declared in the return and not on the income as determined by the assessing authority,
(2) In the absence of any specific mention of the assessing authority in the assessment order charging interest under Section 234A and 234B, no interest could be recovered from the assessee merely by way of demand notice.
The Hon’ble Supreme Court, vide its judgment in CIT v. Ranchi Club Ltd. (supra) has affirmed the above two judgments of the Hon’ble Patna High Court by stating, “We have heard learned counsel for the appellant. We find no merit in the appeals.” The Hon’ble Supreme Court in the case of V.M. Salgaocar & Bros (P) Ltd. Etc. v. CIT Etc. (2000) 243 ITR 383 (SC) has held that when a Special Leave Petition (SLP) is summarily dismissed under Art. 136 of the Constitution, such dismissal would not lay down any law, rather it would be deemed that the Supreme Court had simply held that it was not a fit case where SLP could be granted.
It was further held that the same principle will not apply in a case where a civil appeal was dismissed by the Supreme Court holding that the appeal had no merit and when once the civil appeal was dismissed after hearing the parties holding that the appeal had no merit, then such order becomes one which attracts Article 141 of Constitution or India, which provides that the law declared by the Supreme Court will be binding on all the Courts within the territory of India. In the light of above decision of the apex Court, the law laid down by the Hon’ble Patna High Court in the cases of Ranchi Club Ltd. (supra) and Uday Mistanna Bhandai & Complex (supra) which have been affirmed by the Supreme Court in their order (though brief) has become the law of the land.
Viewed in the above perspective, the ratio laid down by the Hon’ble Supreme Court in the case of Ranchi Club Ltd. (supra) has two aspects. One aspect is that interest under Sections 234A and 234B is leviable on the returned income and not on the income as determined by the assessing authority. The second aspect is that in the absence of any specific mention by the assessing authority in the assessment order charging interest under Sections 234A and 234B, no interest could be recovered from the assessee merely by way of demand notice. While the first aspect has been nullified by the amendment introduced by the Finance Act, 2001, the second facet of the judgment has not been nullified either by the amendment introduced by the Finance Act, 2001, or by promulgating any Central Ordinance by the Union Government. Thus, the decision of the Hon’ble Supreme Court on the second facet in the case of Ranchi Club Ltd. (supra) has become the law of the land.
9. We have perused the assessment order and find that the AO did not specifically mention about charging of interest under Section 234B. Accordingly, following the aforesaid judgment of the Hon’ble Supreme Court, we hold that the AO is not justified in charging interest under Section 234B. The additional grounds accordingly succeed.
10. In the result, the appeal is allowed in part.
U.B.S. Bedi, J. M.
5th Sept., 2001
1. After going through the proposed draft order of the learned AM in ITA No. 531/Pn/1995, I, despite my best pursuasion to myself, not been able to agree with the findings and conclusion as drawn by him with respect to ground Nos. 1 and 2. However, as regards other grounds, I fully concur with his finding. So far as ground Nos. 1 and 2 are concerned, I record my reasons for not agreeing with the conclusions and findings of the learned AM as under:
2. The relevant facts are that in the computation done by the assessee, deductions under Section 80-I/80-IA/80HHC include other income such as interest income and dividend income. The AO observed that interest and dividend income are assessed to the income-tax under the head ‘other sources’ and, therefore, cannot be termed as income derived from profits and gains of business. Moreover, the wording in Section 80-I/80-IA are clear that only incomes ‘derived from’ an industrial undertaking are eligible to be considered while claiming deduction under Section 80-I/80-IA. Therefore, it was opined that the deductions under these sections are not available on the incomes discussed above. This view has been confirmed by the CIT(A) in assessee’s own case for the asst. yr. 1990-91. This being the case, the deduction of the different units calculated excluding interest and dividend income as under:
Name of the unit
Interest
Dividend
Total
Rs.
Rs.
Rs.
Dakhane
6,66.366
3,750
6,70,116
Indore
2,950
2,950
Bangalore
172
172
6,73,238
In view of the above, it was held that no deduction under Section 80-I is available which has been claimed only on the Dakhane unit. In the case of Indore unit on which deduction under Section 80-IA was claimed, it was reduced by Rs. 2,950.
3. Assessee took up the matter in appeal and the learned CIT(A) decided the issue against the assessee by following the decision of the CIT(A) for asst. yr. 1990-91, wherein the disallowance made by the AO was confirmed. Therefore, deduction claimed under Section 80-IA and disallowed by the AO has further been confirmed by the learned CIT(A).
4. Against this order of the learned CIT(A), the assessee is in further appeal and while relying upon the order of this Bench in the case of the assessee for asst. yr. 1991-92 in ITA No. 955/Pn/1994, and C.O No. 14/Pn/1994, dt. 6th Dec., 2000, [since reported as Asstt. CIT v. Kripa Chemicals (P) Ltd. (2002) 76 TTJ (Pune) 889–Ed.] it was pleaded for allowing the deduction as claimed by the assessee, whereas the learned Departmental Representative distinguished the decision as taken by the Bench in the assessee’s own case for earlier year and pleaded for confirmation of the impugned order.
5. After hearing both the sides, going through the orders of the authorities below and the Tribunal order in Departmental appeal and cross-objection of the assessee in ITA No. 955/Pn/1994 and C.O No. 14/Pn/1994, I find that the issue has been set aside on the file of the AO with respect to deduction under Section 80-I on interest income on fixed deposits and the AO has been directed to follow the remarks and observations of the Tribunal in appeal for asst. yr. 1990-91. The observations as contained in the said order are as under :
“After considering the rival submissions, we find that the issue is covered by the decision of this Bench in the case of Jagdish Electronics Ltd., wherein it has been held that if the fixed deposits are made as a commercial expediency, then the interest earned on such FDRs would be business income on which deduction under Section 80-I would be available. Following the said decision we set aside the orders of the CIT(A) on this issue and restore the matter to the file of the AO who shall after giving reasonable opportunity of being heard to the assessee, determine the factual aspect whether the FDRs were purchased by way of commercial expediency or not. If the assessee is found to have purchased, the FDRs with a view to maintain the overdraft facility with the bank, then such interest income would be considered by him as business income allowable for deduction under Sections 80HHA and 80-I. As far as the income from dividend is concerned, the order of CIT(A) is upheld.”
6. It will be imperative to note that this very issue has been decided against the assessee by the Pune Bench comprising of the present Members taking a conscious decision that interest received on FDRs kept in order to maintain overdraft facilities cannot be said to be income, derived from industrial undertaking, and preferred to take a different and contrary view than taken by the Tribunal in the case of Dy. CIT v. Jagdish Electronics (P) Ltd (1998) 66 ITD 542 (Pune) and in order to arrive at the conclusion reliance was placed on various Supreme Court and High Courts decisions, in the case of Vardhini Udyog v. Dy. CIT in ITA No. 411/Pn/1995, dt. 21st Aug., 2001 [reported at (2003) 80 TTJ (Pune) 453–Ed.] for asst. yr. 1991-92. This view has further been followed by this Bench in the case of same assessee for the asst. yr. 1992-93 in ITA No.908/Pn/1995, dt. 30th Aug., 2001, (authored by the learned AM). Therefore, the learned AM was requested vide note sent on 30th Aug., 2001, to reconsider the decision in the proposed order by giving a reference of decision of this Bench in ITA No. 411/Pn/1995, dt. 21st Aug., 2001, in the case of Vardhini Udyog, with respect to ground Nos. 1 and 2 as this was covered by the latest decision of this Bench. But the learned AM vide his reply note showed his inability on the plea that the issue has rightly been set aside and restored back on the file of the AO. Keeping in view the facts of this particular case, and accordingly the ratio laid down in Vardhini Udyog in ITA No. 411/Pn/1995, which was later on passed, will not apply to this case.
7. The learned AM who is senior Member on the Bench has also not suggested in the said note for making a reference to the Special Bench. Both the notes are on record, Therefore, under the circumstances, I have no other alternative but to write my own order.
8. Now coming to the issue in hand about eligibility of interest income on fixed deposits with the bank in computation of deduction under Section 80-IA, I find that the distinguishing feature of the earlier Section 80S and the existing one is that earlier the expression profit attributable to priority industry was on the statute book while in the existing provision legislature has used expression “any profits and gains derived from industrial undertaking”. The controversy had since been going on before the Courts about the scope and actual meaning of the expression ‘attributable to’ and ‘derived from’ and Hon’ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC), for the first time made distinction in the above referred two expressions and relevant observations are at pp. 93 and 94 which are reproduced as under :
“As regards the aspect emerging from the expression ‘attributable to’ occurring in the phrase ‘profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on Which the learned Solicitor General relied, it will be pertinent to observe that the legislature has deliberately used the expression ‘attributable to’ and not the expression ‘derived from’, Had the expression ‘derived from’ been used it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity, in this connection it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ‘ derived from’, as, for instance, in Section 80J. In our view, since the expression of wider import, namely, ‘attributable to’ has been used, the legislature intended to cover receipt from sources other than the actual conduct of the business of generation and distribution of electricity.”
9. Similarly, Karnataka High Court in the case of Sterling Foods v. CIT (1984) 150 ITR 292 (Kar) has discussed the expression ‘derived from’ and observed that expression ‘derived from’ has a definite but narrow meaning and it cannot receive a flexible or wider concept,
10. To the same effect, Hon’ble Madras High Court in the case of CIT v. Jameel Leather Suppers (2000) 246 ITR 97 (Mad) has taken the view in favour of the Revenue. In the case of Ashok Leyland Ltd. v. CJT (1997) 224 ITR 122 (SC) Hon’ble Supreme Court had again reiterated the same view as laid down in the case of Cambay Electric Supply Industrial Co. (supra). And while upholding the above view, Hon’ble Delhi High Court in the case of CIT v. Cement Distributors Ltd. (1994) 208 ITR 355 (Del) has opined that ‘commercial connections are irrelevant from the proposition of ‘derived from’.
11. In view of the criteria and parameters as laid down by their Lordships in various cases, Hon’ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd (1998) 233 ITR 497 (Mad) where issue before it was relating to claim of the assessee for deduction under Section 80HH and the expression used is similar, concluded that assessee who had deposited the amount with State Electricity Board and earned interest, such interest income cannot be said to have been derived from industrial undertaking as immediate source of interest is the deposit and not business,
Their Lordships of Hon’ble Madras High Court have further opined that mere fact that interest amount was assessable as business income itself would not be sufficient unless the source of profit is the undertaking.
Therefore, it was held that the assessee is not eligible to claim deduction and there were no compelling reasons to give wider meaning to the expression ‘derived from’ under Section 80HH to cover every aspect. Further, it will be pertinent to mention that SLP filed by assessee has since been rejected as reported in (2000) 246 ITR (St) 243, as the intention of the legislature was that industrial undertaking must be the source of the profits or gains. [Pandian Chemicals Ltd. v. CIT–SLP (Civil) No. 8014 of 2000].
12. To the same effect, in order to arrive at the conclusion, Hon’ble Madras High Court has followed the ratio of the above judgment of Pandian Chemicals Ltd. (supra) in the case of Fenner (I) Ltd. v. CIT. Further, Hon’ble Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC) were again seized with the same expression ‘derived from’ used in Section 80HH. Their Lordships while considering the decision of the same Court in the case of Cambay Electric Supply Industrial Co. (supra) decided the controversy in respect of claim of the assessee under Section 80HH on the profit earned from sale of import entitlements against the assessee.
13. After taking into consideration the ratio of judgments as noted above, I find that assessee claimed deduction under Section 80-IA and included in its claim for arriving at the amount of interest income from deposits with the banks. Since the claim included interest income on fixed deposits and in view of the ratio of the decisions as cited above and particularly of the Madras High Court decision in the case of Pandian Chemicals Ltd. (in which SLP has also been rejected as noted in the earlier part of the order) this item of income could not be held to be derived from industrial undertaking as there is no direct nexus between the income earned and industrial undertaking and moreover, it is found that industrial undertaking is (sic-not) immediate and effective source of the said income. Income can be said to be derived from an activity if the said activity is immediate and effective source of the said income. To my mind, even income cannot be said to be derived from an activity merely by reason of the fact that activity may have to earn the said income in an indirect, incidental or remote manner. Since commercial connections are irrelevant and it is also not sufficient even if such income is assessable as business income, therefore, interest earned from fixed deposits with the bank which was the direct source of that income cannot be said to have been derived from the industrial undertaking, Therefore, following earlier decision of the Pune Bench in the case of Vardhini Udyog, dt. 21st Aug., 2001, in ITA No. 411/Pn/1995 (supra) and dt. 30th Aug., 2001, in ITA No. 908/Pn/1995, whereby the Bench comprising of the present Members preferred not to place reliance on the earlier decisions in the case of Jagdish Electronics (P) Ltd. (supra) and Finolex Pipes Ltd. v. Dy. CIT (supra), for the reasons given in these orders, I uphold the action of the authorities below and held that interest income is eligible for deduction under Section 80-IA as claimed by the asseessee. It will be worth noting that when two views are there of co-equal strength of the Bench, latest view is to be followed as held by the Hon’ble Delhi Court in the case of Bhika Ram and Ors. v. Union of India and Ors. (1999) 238 ITR 113 (Del) and the relevant portion is reproduced as below :
“However, learned counsel for the petitioner relied on Satinder Singh v. Umrao Singh, AIR 1961 SC 908, to submit that compensation would not be treated as income. Learned counsel further submitted that the decision of the Supreme, Court in Satinder Singh’s case (supra) was not brought to the notice of the Supreme Court when Bikram Singh and Ors. v. Land Acquisition Collector and Ors. (1997) 224 ITR 551 (SC) was decided. It is also submitted that the reasoning on which their Lordships have proceeded in the case of Satinder Singh, (supra), was also not argued before the Supreme Court in Bikram Singh’s case (supra). Not only we are not satisfied about the correctness of the submission so made, we are also of the opinion that such a plea is not open for consideration by us and Bikram Singh’s case (supra), being a later pronouncement of the Supreme Court by a Bench of co-equal strength, it is binding on us.”
In the present case, the latest view is that of dt. 30th Aug., 2001, in ITA No. 908/Pn/1995 which is required to be followed.
14. In view of the facts and circumstances of the case, the precedents as referred to above, I hold that interest income is not eligible for deduction under Section 80-IA.
15. As regards the alternative plea of the assessee as contained in ground No. 2 is concerned, I find that the issue stands covered against the assessee by Hon’ble Supreme Court in the case of CIT v. Dr. V.P. Gopinathan (2001) 116 Taxman 489 (SC). Therefore, this plea of the assessee though academic also does not merit acceptance and hence is rejected.
16. As a result, ground Nos. 1 and 2 of the appeal of the assessee get dismissed.
B.L. Chhibber, A.M.
1. Apropos to your Note, I have to state that in this case, the cross-objection was decided for the same year by the Bench constituted by me and Brother Singhal on 6th Dec., 2000, and the matter was restored to the file of the AO following the decision of this Bench in the case of Jagdish Electronics Ltd. (supra) So the matter already stands restored and now an opposite view cannot be taken, when in the same year in the cross-objection the matter has been restored back to the file of the AO. In the cross-objection we had followed an earlier order in the assessee’s own case relating to asst. yr. 1990-91 in ITA No. 1160/Pn/1992. In any case the matter is being restored to the file of the AO keeping in view the facts of this particular case and accordingly the ratio laid down in Vardhini Udyog, (ITA No. 411/Pn/1995) (supra) which was later on passed will not apply to this case.
REFERENCE UNDER Section 255(4) OP THE IT ACT, 1961
21st Sept., 2001
Since there is a difference of opinion between the Members constituting the Bench, therefore, we state and formulate following points of difference for reference to the Hon’ble President, Tribunal, for their necessary action;
“Whether,
action in holding that interest income on FDRs is not eligible for deduction under Section 80-IA and for that purpose, gross interest is excludable, is justified
or
action in setting aside the issue and restoring it back to the AO for determining whether FDRs were for business expediency and to follow the decision in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune), is justified.
M.K. Chaturvedi, Vice President
7th March, 2003
1. This appeal came before me as a Third Member to express my opinion on following question :
“Whether,
action in holding that interest income on FDRs is not eligible for deduction under Section 80-IA and for that purpose, gross interest is excludable, is justified.
or
action in setting aside the issue and restoring it back to the AO for determining whether FDRs were for business expediency and to follow the decision in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune) is justified.”
2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. I find that the learned AM, in the case of Vardhini Udyog v. Dy. CIT, ITA No. 411/Pn/1995, dt. 21st Aug., 2001, [reported at (2003) 80 TTJ (Pune) 453–Ed.] did not follow the view expressed by the Pune Bench in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune). The relevant para is reproduced here as under:
“………So far as the reliance placed by the assessee on the decisions of Pune Bench of the Tribunal in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune) and Finolex Pipes Ltd. v. Dy. CIT (2000) 68 TTJ (Pune) 422, we find that those decisions have been rendered prior to considering the various High Court decisions as considered by us in the earlier portion of this order. Therefore, we prefer to rely upon various Supreme/High Court decisions including that of Madras High Court in the case of Pandian Chemicals Ltd. & Ors. cited supra in order to arrive at a conclusion. In view of the facts and circumstances, case law as discussed and relevant provisions of law, we hold that the action of the authorities below is justified in not allowing the relief as claimed by the assessee. As a result, the order of the CIT(A) in this regard is confirmed. Therefore, this ground of the assessee also gets dismissed.”
3. For the reasons given by me in even dated Third Member case, Kirloskar Electrodyne Ltd. v. Dy. CIT in ITA No. 170/Pn/1992, [reported at (2003) 80 TTJ (Pune)(TM) 436–Ed.] I hold that the interest income on FDRs is not eligible for deduction under Section 80-IA of the IT Act, 1961. I am, therefore, inclined to agree with the view taken by the learned JM on this aspect.
The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
U.B.S. Bedi, J.M.
7th March, 2003
1. As there was a difference of opinion between the AM and the JM, following question was referred to a Third Member:
“Whether,
action in holding that interest income on FDRs is not eligible for deduction under Section 80-IA and for that purpose, gross interest is excludable, is justified
or
action in setting aside the issue and restoring it back to the AO for determining whether FDRs were for business expediency and to follow the decision in the case of Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune) is justified ?”
2. The learned Vice President, Shri M.K. Chaturvedi, sitting as Third Member by his opinion dt. 7th March, 2003, has concurred with the view of the JM that the interest income on FDRs is not eligible for deduction under Section 80-IA of the IT Act. In accordance with the majority view, we hold that interest income on FDRs is not eligible for deduction under Section 80-IA of the Act.
The assessee fails on this ground of appeal and other part of this order shall remain unchanged.
3. As a result, appeal of the assessee is partly allowed.