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1. This appeal of the assessee is directed against CIT(A)’s order dated 28-2-1997.
2. The assessee had claimed deductions u/s. 80HH & 80I on interest received at Rs. 5,73,826/-. In response to the AO’s query, assessee stated that the interest income was received during the year to lessen the burden of interest payments and was out of industrial activity of the unit situated at Daman. The loans were advanced out of surplus funds from the business. The assessee’s reply did not find favour with the AO and he held that interest income could not be treated as profit & gains derived from business of an industrial undertaking set up in the backward are. He, therefore, disallowed the assessee’s claim for deduction u/s. 80HH & 80I.
3. In the first appeal the Id. CIT(A) upheld the AO’s order. The relevant extracts from CIT(A)’s order are reproduced as under –
“In view of the above I am of the opinion that nature of interest earned by the appellant on advances is not a business income but income under the head “other sources”. The decision of Hon’ble Bombay High Court in the case of CIT v. United Carbon India Ltd. does not help p the appellant as deduction u/s. 80I as it existed at the relevant time was allowable in relation to “income attributable to the business” whereas deduction U/s. 80HH and 80I relevant to the assessment year under consideration is allowable with reference to “income derived from business” and it was held by the Hon’ble court in that case that the language use in section 80I viz. “income attributable to the business” was wider in view than the expression “income derived from the business” and in view than the expression “income derived from the business” and it was in view of this provision prevalent in the A.Y. 70-71 that the Hon’ble court agreed with the Tribunal that interest income arisen from the surplus funds could be stated to be attributable to the business income of the assessee and deduction u/s. 80I was allowable with reference to the interest income earned at the relevant time. The Hon’ble Supreme Court has clearly brought out in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT 2002-Taxindiaonline-76-SC-IT that the terms “derived from” and “attributable to” have different connotations. The present section uses the term”derived from” which has a narrow meaning and in that context it has to be concluded that interest received was not a business income. Inevidently it may be pointed out that the decision of Bombay High Court relied upon by the appellant in the case of United Carbon India Ltd. has also been considered by ITAT in the case of Goneka Trading Co. Bombay. in view of the above I am of the opinion that interest of Rs. 2,29,074/- earned by the appellant on advance made had not been derived from the business activities and therefore was not in the nature of business income and in the circumstances the assessing officer is justified in excluding the interest to the extent of Rs. 2,29,074/- from business income while working out the deduction u/s. 80Hh and 80I. Thus the assessing officer is directed to recomputed the deduction allowable u/s. 80HH and 80I in view of the above directions.”
Being aggrieved by the CIT(A)’s order, assessee has come up in appeal before us.
4. The learned of the assessee by referring to relevant document at pages 6, 7 & 8 of the paper book contended that the interest receipt had accrued during the year of account for late payment of assessee’s bills (trading activities) as well as on short term advances which were business activities. Hence, according to the assessee, interest receipt should be treated as income rom industrial activity only. Without prejudice to the above contention, the Id. counsel contended that interest received should be reduced from tax paid and only the net interest income, if any should be considered. In this regard reliance was placed on the decision of ITAT Mumbai Bench ‘A’ in the case of Pink Star v. DCIT 2002-Taxindiaonline-30-ITAT-Mum With regard to the main contention, the Id. counsel has relied upon the following decisions :-
i) Dy. CIT v. Transpower (P) Ltd. 80 ITD 1 (Gau.)
ii) ACIT v. Gallium Equipment (P) Ltd. 79 ITD 41 (Del)
ii) CIT v. Paramount Premises (P) Ltd. 190 ITR 259 (Bom)
iv) CIT v. Nagpur Engineering Co. Ltd. 245 ITR 806 (Bom)
5. On the other hand, the Id. DR adverted our attention to the relevant portions of the AO’s order and pointed out that in this case loans on which interest was earned by the assessee, were advanced out of the surplus funds of the business. Thus, according to the Id. DR, such interest receipts could be only used under the head ‘income from other sources’ and such receipts could not be considered as profit & gains derived from an industrial undertaking. The Id. DR also placed reliance on the order of the CIT(A) wherein it has been discussed that Hon’ble Supreme Court had fairly brought out in the case of Cambay Electric Supply Industrial Co. Ltd. that the term ‘derived from’ and ‘attributable to’ have different connotations. The words ‘derived from’ uses in sections 80HH & 80I have narrow meaning and in that context it has to be concluded that interest received could not be considered as profit and gains derived from an industrial undertaking. The Id. DR relied upon the decision of the Kerala High Court in the case of K. Ravindranathan v. Dy. CIT & Anr. Regarding the assessee’s alternate contention regarding netting of interest income, the Id. DR contended that such netting could not be allowed as interest payments are in respect of monies borrowed for the purposes of business and are debited to profit & loss account, whereas interest earned by the assessee is an income from other sources. Therefore, according to the Id. DR, interest receipts and interest payments are to be considered under different heads of income and hence, no netting could be allowed by treating the same under the head ‘business income’. The Id. DR by relying upon the decision of Supreme Court in the case of Dr. V.P. Gopinathan (248 ITR 449) contended that interest income earned by the assessee could be diminished only if there was a provision in law permitting such diminution. It was stated that interest payments were not made for earning the interest income but in fact the interest payments were in respect of monies borrowed for the purpose of business.
6. We have given a careful consideration to the rival submissions in the light of the material placed before us. The decisions relied upon by the Id. Counsel of the assessee do not support the case of the assessee due to peculiar facts of the instant case. Actually this is a factual issue to determine whether the interest receipts are derived from an industrial undertaking. The AO has given a clear finding that only the surplus funds of the business were advanced as loans to earn the interest income. Therefore, such income could be assessed only under the head ‘income from other sources’. Even the assessee’s contention of netting the interest income could not be accepted, as the interest receipts and interest payments are under different heads of income. As already pointed out above, interest receipts are under the head ‘income from other sources’, whereas interest payments are to be considered under the head ‘business’. In the case of Pink Star which is relied upon by the Id. counsel of the assessee, the funds were kept in fixed deposits for the purposes of the business. In the instant case the assessee could not prove that surplus funds of the business were advanced on loans for the purpose of business. We therefore, hold that there is not infirmity in the order of the CIT(A). The appeal of the assessee is dismissed being without any merit.