Andhra Pradesh High Court - Amravati

Kanakadurga Agro Oil Products ... vs Asst. Commisioner Of Income Tax, ... on 26 September, 2022

     IN THE HIGH COURT OF ANDHRA PRADESH:
                  AT AMARAVATI
                       ***

I.T.T.A.No.793 of 2006 Between:

Kanakadurga Agro Oil Products Limited, Gangur, Penamaluru Mandal, Krishna District.

.... Appellant And Assistant Commissioner of Income Tax, Circle-I, Vijayawada.

....Respondent.

Date of Judgment pronounced on : 26.09.2022

THE HON'BLE SRI JUSTICE C. PRAVEEN KUMAR

AND

THE HON'BLE SRI JUSTICE A.V. RAVINDRA BABU

1. Whether Reporters of Local newspapers : Yes/No may be allowed to see the judgments?

2.Whether the copies of judgment may be marked: Yes/No to Law Reporters/Journals:

3.Whether the Lordship wishes to see the fair copy : Yes/No of the Judgment?

________________________________ JUSTICE C. PRAVEEN KUMAR

CPK, J & AVRB,J I.T.T.A.No.793 of 2006

* THE HON'BLE SRI JUSTICE C. PRAVEEN KUMAR

AND

THE HON'BLE SRI JUSTICE A.V. RAVINDRA BABU

+ I.T.T.A.No.793 of 2006

% 26.09.2022

#Kanakadurga Agro Oil Products Limited, Gangur, Penamaluru Mandal, Krishna District.

.... Appellant And

$ Assistant Commissioner of Income Tax, Circle-I, Vijayawada.

....Respondent.

! Counsel for the Appellant: Ms. Jyothi Ratna Anumolu

Counsel for the Respondent: Ms. M. Kiranmayee, Standing Counsel for Income Tax.

<Gist :

>Head Note:

? Cases referred:

1) (2002) 122 Taxman 516 (Madras)

2) (2006) 155 Taxman 330 (Guj)

3) (2003) 262 ITR 0278

4) (1999) 237 ITR 0579

5) (1948) 16 ITR 325 (PC)

6) (1955) 27 ITR 1 (SC)

CPK, J & AVRB,J I.T.T.A.No.793 of 2006

THE HON'BLE SRI JUSTICE C.PRAVEEN KUMAR

AND

THE HON'BLE SRI JUSTICE A.V. RAVINDRA BABU

I.T.T.A.No.793 of 2006

JUDGMENT:- (per the Hon'ble Sri Justice C. Praveen Kumar)

The short point that arises for consideration in this

appeal is with regard to the applicability of the words

"derived from an industrial undertaking" as mentioned

under Section 80(I) of the Income Tax Act, 1961 [for short,

"I.T. Act"] to the case of the appellant.

2. The present appeal is filed under Section 260-A of the

I.T. Act assailing the order in I.T.A.No.336/Vizag/2000

dated 13.06.2006.

3. The facts, in issue, are as under:-

(a) The assessee is engaged in business of

manufacture and production of rice bran oil, other oils, oil

cakes etc. The appellant is assessed to Income Tax by the

Assistant Commissioner of Income Tax, Circle-I,

Vijayawada at that material point of time. For the

assessment year 1997-98, the company filed its returns on

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27.10.1997 declaring the total income of Rs.23,67,220/-.

While filing its return, the assessee claimed deduction of

Rs.2,60,580/- under Section 80(I) of the I.T. Act. The

return was taken up for scrutiny under Sections 143(2)

and 142(1) of I.T. Act. The assessment was completed on

08.05.1998 by allowing deductions only to an extent of

Rs.55,924/-. The reason for restricting the deduction

appears to be that the interest paid was not derived from

the business of the manufacture and production of the

industrial undertaking.

(b) Aggrieved by the same, the assessee preferred an

appeal to CIT Appeals (IV), Hyderabad bearing ITA

No.154/CIT(A)/VJA/98-99. The Commissioner of Appeal

found that as the interest amount of Rs.14,60,994/- was

received from the debtors, on account of delay in payment

of sale proceeds, the same cannot be said to have derived

from industrial undertaking and accordingly allowed the

appeal in part vide Order dated 31.07.2000. The assessee

carried the matter in appeal before the Income Tax

Appellate Tribunal, Visakhapatnam Bench in ITA

No.336/Vizag/2000. The Judicial Member of the Tribunal

accepted the plea of the assessee in holding that the

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amount was from the business of the manufacture and

production by following the decisions laid down by various

Courts. However, the Accountant Member disagreed with

the view expressed by the Judicial Member and rejected

the plea of the assessee, as such, the matter was referred

to a Third Member under Section 255 (4) of the I.T. Act.

on the facts and circumstances of the case, the

assessee shall be entitled for deduction under Section

80(I) in respect of interest received on delayed

payment by the customers?

(d) The Third Member agreed with the view expressed

by the Accountant Member and held that the interest

receivable from the debtors on account of the delayed

payments of sale proceeds is not an income derived from

the business of industrial undertaking. The said

conclusion was mainly based on the judgment in Nirma

Industries vs. ACIT reported in (1995 ITD 199).

4. Aggrieved by the same, the assessee preferred the

present appeal.

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5. Ms. Jyothi Ratna Anumolu, learned counsel

representing Sri Challa Gunaranjan, learned counsel for

the appellant, mainly submits that the Tribunal erred in

coming to a conclusion that the interest earned from

debtors, payable for the delay, in remitting the sale

proceeds to the assessee is not an income derived from the

industrial undertaking engaged in the business of

manufacture and production. She relied upon the

judgments of Madras High Court in Commissioner of

Income Tax vs. Madras Motors Limited1, and the

judgment of High Court of Gujarat in Nirma Industries

Limited vs. Deputy Commissioner of Income Tax2.

While distinguishing the ratio laid down in Pandian

Chemicals Limited Vs. CIT3, would contend that the

Tribunal ought to have given the relief to the assessee.

6. Ms. M. Kiranmayee, learned Standing Counsel for

Income Tax, appearing for the respondent, mainly relied

upon the judgment in Pandian Chemicals Ltd. [cited 3

supra] and also the judgment of Hon'ble Supreme Court in

Commissioner of Income Tax vs. Sterling Food,

1 (2002) 122 Taxman 516 (Madras) 2 (2006) 155 Taxman 330 (Guj) 3 (2003) 262 ITR 0278

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Mangalore4, to contend that the interest paid on delayed

payments cannot form part of same transactions, and as

such, it cannot be said that it was a gain derived from its

industrial undertaking.

7. The point that arises for consideration is, whether in

the facts and circumstances of the case, the assessee

is entitled for deduction under Section 80(I) of the I.T.

Act?

8. Section 80(I) of the Income Tax Act, 1961 reads as

under:-

"80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft], to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof:

Provided that in the case of an assessee, being a company, the provisions of this sub-section [shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel]

4 (1999) 237 ITR 0579

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as if for the words ― "twenty per cent" the words ― "twenty-five per cent" had been substituted.

(1A) Notwithstanding anything contained in sub-section (1), in relation to any profits and gains derived by an assessee from--

(i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or

(ii) a ship which is first brought into use; or

(iii) the business of a hotel which starts functioning,

on or after the 1st day of April, 1990, [but before the 1st day of April, 1991], there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty- five per cent thereof.

Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words ― "twenty-five per cent" the words ― "thirty per cent" had been substituted.]

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:--

(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

CPK, J & AVRB,J I.T.T.A.No.793 of 2006

(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of [ten years] next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;

(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:

Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section.

Provided further that the condition in clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words ―not being any article or thing specified in the list in the Eleventh Schedule had been omitted."

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9. The controversy revolves around the word 'derived'

and the word 'industrial undertaking'. The question is

whether the interest paid on delayed payments form

part of profits and gains derived from an industrial

undertaking?

10. Section 80HH of the I.T. Act, which deals with

deductions in respect of the profits and gains from newly

established industrial undertakings or Hotel business in

backward areas also contains the phrase "profits and gains

derived from an industrial undertaking." The word 'derived'

has been construed by the Privy Council in CIT vs. Raja

Bahadur Kamakhaya Narayan Singh5 (1948) 16 ITR

325 (PC) wherein it was observed as under:-

"The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But, the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition."

The above definition was approved and reported by a

Constitution Bench of the Hon'ble Supreme Court in

5 (1948) 16 ITR 325 (PC)

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Bacha F. Guzdar vs. CIT6. Having regard to the above,

the Hon'ble Supreme Court in Pandian Chemicals Ltd.

[cited 3 supra] observed that the word "derived from" in

Section 80-HH of the Income Tax Act, 1961 must be

understood as something which has direct or immediate

nexus with the appellant's industrial undertaking.

11. As stated earlier, learned Standing Counsel for the

Income Tax also relied upon a judgment in Sterling Food

case [cited 4 supra]. In the said case, the Hon'ble

Supreme Court while negating the claim of the assessee

categorically observed that:

"There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking."

12. It is to be noted here that in Pandian Chemicals, the

assessee made deposits in the Tamil Nadu Electricity

Board and was earning interest thereon. For getting

power connection, every industrial undertaking had to

maintain deposit in Electricity Board. The Division Bench

held that the interest derived from such deposits could not

be said to have been derived from industrial undertaking.

6 (1955) 27 ITR 1 (SC)

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This view of the High Court was accepted by the Hon'ble

Apex Court. Therefore, any interest earned by the assessee

from the bank deposits or from deposits made which

would not have a direct nexus with the

business/industrial undertaking of the assessee cannot be

an incidental income and such income has to be ignored

for claiming benefits under Section 80-HH of the I.T. Act.

13. The question before Sterling Food [cited 4 supra]

was whether the income derived by the assessee by the

sale of the import entitlements was profit and gain derived

from its industrial undertaking of processing sea food.

After referring to Section 80-HH of the I.T. Act; the

judgments in (1) Cambay Electric Supply Industrial Co. vs.

CIT reported in (1987) 113 ITR 84 (SC); (2) CIT Madras-I

vs. Wheel and Rim Company of India Ltd. reported in

(1997) 107 ITR 168 (Mad) and (3) National Organic

Chemical Industrial Ltd. vs. Collector of Central Excise,

Bombay reported in JT 1997 (1) 637 (SC), the Hon'ble

Supreme Court held that source of import entitlements

cannot be said to be the industrial undertaking of the

assessee. The Court held that the source of import

entitlement can, in the circumstances, only be said to be

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the Export Promotion Scheme of the Central Government

where under the export entitlements become available.

Therefore, there must be, for the application of the words

'derived from', a direct nexus between the profits and

gains and the industrial undertaking. In the facts of the

said case, it was held that a nexus was not direct, but only

incidental. Hence, the benefit was not given.

14. At this stage, it would also be appropriate to refer the

judgment of Cambay Electrical case [(1987) 113 ITR 84

(SC)] wherein it was held that:

"The expression 'attributable to' was wider in import than the expression 'derived from'. The expression of wider import, namely, 'attributable to', was used when the legislature intended to cover receipts from sources other than the actual conduct of the business."

15. The question now is, whether the ratio laid down

in the judgments referred to above apply to the case

on hand?

16. As stated earlier, the wording in Section 80-HH of

the I.T. Act and in Section 80(I) of the I.T. Act, are almost

identical, in so far as the words in dispute. As stated

earlier, the issue in the instant case is whether the

CPK, J & AVRB,J I.T.T.A.No.793 of 2006

interest paid by the customers for delayed payments on

the supplies received by them will be liable for exemption

or in other words whether it can be said that the profit or

gain received has been derived from an industrial

undertaking? The Madras High Court in Madras Motors's

case [cited 1 supra], held as under:

"...the word, 'derived' is not a term of art and its use in the definition indeed demands an enquiry into the genealogy of the product, but the enquiry should stop as soon as the effective source is discovered and the profit or gain can be said to have been 'derived' from an activity carried on by a person, if the said activity is the immediate and effective source of the said profit or gain... there must be a direct nexus between the activity and the earning of the profit or gain and the income, profit or gain cannot be said to have been derived from any 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...."

17. Apart from that, the Hon'ble Supreme Court in the

judgment referred to earlier, more particularly in Sterling

Food Case [cited 4 supra], categorically observed that for

application of the words 'derived from', a direct nexus

between the profits and gains and the industrial

undertaking has to be established. The instant case, is not

one, where the interest received was incidental or ancillary

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to the deposit made. The interest received is a direct

consequence of the goods supplied. The interest is directly

relatable to the amounts received by the assesse during the

course of its business on account of sale by the assessee to

his customers.

18. In Nirma Industries [cited 2 supra], the Division

Bench of Gujarat High Court dealt with a fact situation

where late payment was received by the assessee due to

default of the customers. The assessee authority held that

the same has nothing to do with the industrial undertaking

or the manufacturing activity of the assessee. On appeal,

the Commissioner (Appeals) held that the assessee was

entitled to include interest while computing the profits and

accordingly granted relief under Section 80(I) of the I.T.

Act. On Revenue's appeal, the Tribunal disagreed with the

view expressed by the Commissioner (Appeals).

Challenging the same, a writ petition came to be filed

before the High Court. It would be just and proper to

extract the relevant portion of the order, which is as

under:-

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"30. The Tribunal was, therefore, not justified in holding that while computing deduction under Section 80-I of the Act, interest received from trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking."

19. Similar view was taken by the Madras High Court in

Madras Motors case [cited 1 supra]. It would be

appropriate to extract the relevant portion of the order,

which is as under:-

"3.2. Let us now consider the interest earned by the assessee on the belated payments. There can be no doubt that this interest would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments of the forgings and then agree to pay the interest on the delayed payments, the said interest would have its direct nexus with the business of forgings. The true test would be whether such interest would be available to the assessee otherwise also. The answer to the question would be certainly in negative. The interest being directly relatable only to the amounts received by the assessee during the course of its business on account of the sale of forgings, would have to be included as the profits and gains derived from the business of the assessee. We hold that this part of the interest would be entitled to be covered by section 80-HH."

20. As stated earlier, the fact situation in the case on

hand also relates to payment of interest on delayed

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payments of sale proceeds to the assessee. As observed in

the Gujarat High Court that there are two methods of

realizing sale consideration, the object being to realise sale

proceeds at the earliest and without delay. To avoid any

loss to the assessee on account of the delayed payments,

for the goods supplied, two contingencies can be stipulated

(1) charging little higher rate or (2) collecting interest on

delayed payments. By this, the transaction would not be

incidental or different. In our view, it forms part of the