JUDGMENT
D.N. Baruah, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question has been referred for opinion of this court :
“Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 80HH of the Income-tax Act, 1961, the Tribunal was correct in holding that the interest income of Rs. 6,06,943 and profit on sale of fixed assets amounting to Rs. 7,469 derived by the assessee did not form part of profits and gains derived from an industrial undertaking and that the assessee was not entitled to deduction under Section 80HH on such profits and gains?”
2. The facts for the purpose of this case may be briefly stated as follows :
The assessee was assessed as a company for the year 1985-86. Amongst other things, it derived some income from interest to the extent of Rs. 6,06,943. After depreciation, income from business worked out at a loss of Rs. 4,01,918. After adding back the interest income mentioned above, the net result was a positive income figure of Rs. 2,12,492. The assessee, therefore, claimed relief under Section 80HH of the Act, but the Assessing Officer held that there was no profit from the industrial undertaking and relief was not given to the assessee. Being aggrieved, the assessee took up the matter before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals), by his judgment dated April 28, 1989, held that in the case of the assessee the interest income arose on account of surplus fund available with the assessee which may be due to profits or due to some other reasons and the interest income did not arise from the industrial undertaking and is completely different from the income derived from industrial undertaking. The Commissioner of Income-tax (Appeals) did not allow the relief as claimed for under Section 80HH of the Act. The assessee took up the matter before the Tribunal and the Tribunal upheld the findings of the Commissioner of Income-tax (Appeals). At the instance of the assessee, the above question has been referred for opinion of this court.
3. We have heard Mr. R. Goenka, learned counsel appearing for the assessee, and Dr. A.K. Saraf, learned special counsel for the Revenue. Mr. Goenka submits that the interest is accrued out of profits earned by the assessee from the industrial undertakings, therefore, the interest is nothing but the profits and gains earned out of the industrial undertaking, therefore, Section 80HH is applicable in the present case. Besides, the amount received after sale of some of the assets are also profits and gains earned from the industrial undertaking, therefore, according to Mr. Goenka, the Tribunal was not justified in disallowing the claim. Dr. Saraf, on the other hand, submits that the interest is covered under Clause (E) of Section 14 and falls within the meaning of “income from other sources” and the profits and gains of business is mentioned in Clause (D) of Section 14, therefore, by no stretch of imagination the interest can be included as profits and gains earned from the industrial undertaking. Besides, Dr. Saraf submits that when a part of the industrial undertaking is sold it cannot be termed as profits and gains from the industrial undertaking and it is only conversion of a particular property to money. In this connection, Dr. Saraf has drawn our attention to Section 41(2) of the Act, since repealed. Pointing out to that section, Dr. Saraf submits that where any building, machinery or plant owned by the assessee is sold it cannot be termed as profits and gains derived from industrial undertakings. Dr. Saraf further submits that profits and gains which come within the scope of Section 80HH should be directly derived from industrial undertaking.
4. On the rival contentions of the parties it is to be seen whether the Tribunal was justified in disallowing the claim of the assessee. Admittedly, the interest does not come within the scope of “profits and gains of business” as mentioned in Section 14D of the Act. It is also well established that interest comes under the heading of “Income from other sources”. Therefore, any income earned from fixed deposits and the interest thereon cannot be said to be profits and gains derived from industrial undertaking.
5. In this connection, Dr. Saraf has drawn our attention to a decision in Sterling Foods v. CIT [1984] 150 ITR 292 (Kar). In the said decision, the Karnataka High Court observed thus (at page 297) :
“Section 80HH was meant to give a tax rebate to certain categories of assessees and one who wants to claim such relief must strictly satisfy the requirements prescribed thereunder. He must establish that his profits and gains were derived from his industrial undertaking or the business of a hotel. It is just not sufficient if a commercial connection is established between the profits earned arid the industrial undertaking. The law requires that such profits must have been derived from the industrial undertaking. The industrial undertaking must itself be the source of that profit. The business of that industrial undertaking must directly yield that profit. It must be the direct source of that profit and not a means to earn any other profit.”
6. In Cochin Company v. CIT [1978] 114 ITR 822 (Ker), Justice Balakrishna Eradi (as he then was) speaking for the Bench, observed thus (at page 830) :
“There must be a direct nexus between the activity and the earning of the profit or gain. The income, profit or gain cannot be said to have been ‘derived’ from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner.”
7. The above decision of the Kerala High Court has been followed by the Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951.
8. The Bombay High Court also observed that the expression “derived from” cannot be accepted as equivalent to “referable to”.
9. In Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. CIT[1983] 143 ITR 590, the Madhya Pradesh High Court had the similar view.
10. The Delhi High Court in CIT v. Cement Distributors Ltd. [1994] 208 ITR 355 relying on the decision of the Karnataka High Court in Sterling Foods v, CIT [1984] 150 ITR 292 observed thus (at page 363) :
“The source of particular income by an assessee on which a rebate is sought for must directly emerge from the running of the industrial undertaking, yielding profits and gains. Rebate is not allowable if the particular income is merely attributable or relatable to an industrial undertaking. …”
11. In view of the above decisions and also on going through the facts and circumstances of the case, we are not inclined to agree with the submissions of learned counsel for the assessee. Therefore, the interest amounting to Rs. 6,06,945 and the profit on sale of fixed assets amounting to Rs. 7,469 cannot be said to be profits and gains derived from industrial undertaking or hotel business as mentioned in Section 80HH of the Act.
12. For the reasons stated above, we answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee.
13. A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal.
14. In the facts and circumstances of the case, we make no order as to
costs.
