1. These four appeals by the assessee, Pondicherry Distilleries Ltd., relating to its income-tax assessments for the years 1976-77, 1978-79 to 1980-81 involving common objections, are conveniently disposed of by this consolidated order.
2. The common objection raised by the assessee pertains to the determination of the quantum of deduction allowable to it under Section 80HH of the Income-tax Act, 1961 ('the Act'). The assessee is a public limited company wholly owned by the Government of Pondicherry and is engaged in the business of manufacture and sale of liquor (arrack). It was incorporated on 8-12-1971 and commenced production on 15-5-1972. It is assessed to income-tax from the assessment year 1973-74 onwards. The financial year ending 31st of March is the previous year for each of the assessment years involved, so that it ended on 31-3-1976 for the assessment year 1976-77, on 31-3-1978 for the assessment year 1978-79, on 31-3-1979 for the assessment year 1979-1980, and on 31-3-1980 for the assessment year 1980-81. The assessee-company for each of the years held fixed deposits in banks, the amounts of the deposits representing accumulated profits and reserves; the assessee not having delacared or distributed any dividend right from the beginning. On these fixed deposits it earned interest, which was assessed under the head 'Income from other sources'. The assessee claimed that the deduction under Section 80HH which was allowed in respect of its profits and gains emanating from distillery operations, i.e., manufacture of liquor, should also be allowed in respect of the income derived by way of interest on the fixed deposits. This has been disallowed by the departmental authorities and, hence, the assessee is in further appeal before the Tribunal. It is seen that the interest on fixed deposits in respect of which it claimed 80HH deduction is as under:Assessment year Amount Rs. 1976-77 1,70,446 1978-79 3,89,5731979-80 4,94,3971980-81 4,71,998 Deduction under Section 80HH is 20 per cent of the profits and gains contemplated therein. The departmental authorities have rejected the assesssee's claim, distinguishing the cases relied on by the assessee and stated before them. The Commissioner (Appeals) in his order has sought to distinguish the decisions relied on by the assessee and has upheld the disallowance of the claim following the Kerala High Court decision in Collis Line (P.) Ltd. v. I TO  135 ITR 390. In the appeal before us the assessee vehemently reiterates its claim. It is submitted that the assessee had various projects in its mind to be undertaken and put through, for which purpose it had to accumulate the profits earned by it and thought it fit to keep them in fixed deposits at banks. It is stated that the fixed deposits are for periods of three to five years. In this connection, the learned Counsel for the assessee referred to various Board resolutions, copies whereof were included in the paper book compilation filed by the assessee. Referring to the first such resolution appearing at page 13 of the paper book, at the Board meeting held on 30-6-1978, it is pointed out that the Board has in the meeting resolved not to recommend any dividend to the members in respect of its account for the year 1977-78 as the surplus funds are required for future expansion of the company. It is then stated that the Central Board for the Prevention and. Control of Water Pollution, New Delhi, had required that suitable steps should be taken for the disposal of the effluent from the distillery and in pursuance thereof the Board in its meeting held on 28-3-1979 considered this question and it was decided to recover potash from the distillery effluent by evaporation and market it as fertilizer, as such a process would be economical as compared to the disposal of effluent through closed conduit into the deep sea without any return on investment and it was decided to appoint Engineers India Limited, New Delhi, as consultant for the project of mechanical evaporation of effluent of the distillery on cost reimbursement basis, subject to a maximum of Rs. 1.35 lakhs. It is further stated that the Board was also contemplating to establish a project for manufacture of sodium bichromate and in its meeting held on 19-12-1979 it was resolved to entrust the work of preparation of project report to the District Industries Centre, Pondicherry, in the first instance and also to meet necessary expenses in this connection.
However, it was stated that according to the intimation received from the Director of Industries, such a project was reserved exclusively for a small-scale industry and as the assessee-company was a medium scale industry, it had to give up the project. The assessee-company also took up the proposal for laying submarine pipelines for the disposal of the distillery effluent as per the direction of the Central Board for Prevention and Control of Water Pollution and this has since been completed. Another project in its contemplation was said to be the adoption of French technology for manufacture of high protein cattle feed from the distillery effluent and it is stated that the resolution was passed in the Board meeting on 12-5-1982 and the chairman of the company was deputed to France to have preliminary discussions with French technologists and to undertake an on the spot study of the project. It is stated that as a result, the company has decided to go in as a first step for the pilot project plant for the adoption of French technology for manufacture of cattle feed from the distillery effluent and in this connection reference was made to a Board meeting held on 12-5-1982. Another feature highlighted by the learned Counsel in this connection is that the company had to provide quarters to the employees for which purpose it had to take up construction of residential quarters for them and it is stated that a sum of Rs. 16.8 lakhs had already been spent for the construction of staff quarters. It is also stated that the company had also to purchase new machineries in replacement of very old items of machineries. It is also stated that as against the existing capacity of 6,000 litres per day, it was decided in the Board meeting held on 18-8-1981 to increase the capacity to 12,000 litres per day in view of the availability of molasses from sugar industry which was coming up in Pondicherry region and the company had submitted proposals to the Government for necessary approval of expansion, the cost of which was estimated to be around Rs. 50 lakhs. It is submitted on the facts stated above that particularly in view of the three projects, namely, the proposal for laying the submarine pipelines for the disposal of distillery effluent, the proposal to adopt French technology for manufacture of high protein cattle feed and the construction of staff quarters and further the need for replacement of existing machinery by new ones, it should be held that the amounts kept by the assessee-company in fixed deposits in banks were intended for utilisation in such projects in contemplation and as they were not immediately required they were kept in fixed deposits, but nonetheless the amount constitute funds invested by the assessee in its business undertaking and, therefore, the interest earned thereon should be regarded as income derived from business undertaking of the assessee. Reference was made and reliance placed on the order of the Tribunal, Madras Bench 'C', dated 30-1-1980 in [IT Appeal Nos. 1003 (Mad.) of 1979 and 10288 (Mad.) of 1979] in the case of Aurofood (P.) Ltd. Reference was also made in this connection to the decision of the Calcutta High Court in Phillips Carbon Block Ltd. v.CIT  136 ITR 205 and the Bombay High Court decision in CIT v.Hindustan Antibiotics Ltd.  137 ITR 42. The learned departmental representative, on the other hand, contended that the resolutions referred to by the learned Counsel for the assessee cannot furnish the basis for holding that the intention from the beginning was to accumulate the profits for the assessee's business projects as these resolutions were passed long after. In any case the dates fall outside the accounting years relevant for the first three assessment years. It was further contended that even if the amounts could be held to be retained for contemplated projects or for future expansion of business of the assessee, the income derived by way of interest on fixed deposits cannot be equated to the income derived from the profits and gains of the industrial undertaking envisaged by Section 80HH because the nexus of the income by way of interest is the investment in fixed deposits and not the manufacture or production of alcohol. The learned Counsel for the assessee particularly pointed out that according to the decision of the Calcutta High Court in Phillips Carbon Block Ltd.'s case (supra), the purpose for which the accumulation is made is not relevant and the assessee did not keep idle money which was not required for the business but kept back the profits for being utilised in the new projects.
3. We have carefully considered the facts and the rival contentions of the parties. There is no dispute that the assessee has been holding substantial amounts in fixed deposits in these years. It is also apparent that these deposits came out of the accumulated profits and the reserves it had created or had to create, as for instance the development rebate reserve and it is also found that the assessee had not distributed any dividend right from the beginning. Of course nothing turns on that fact of non-distribution of dividend in view of the fact that the assessee-company is wholly owned by the Government of Pondicherry and obviously, therefore, there is no question of clamour of shareholders wanting the declaration of dividend as it would otherwise have been in a case of company with public subscription. The assessee's stand, as we have noticed, is that it was keeping the money for its intended future expansion of projects. Whether this was the object of its non-distribution of the profits as dividend and accumulating them over the period of years is not clinched by any supporting or corroborative evidence at least for the first three assessment years, as pointed out by the learned departmental representative, and the claim can only be decided on the basis of probabilities having regard to the course of conduct of the assessee.
The evidence of the Board resolutions in respect of the projects and schemes referred to by the learned Counsel might probably support the assessee's claim to some extent for the assessment year 1979-80 and in respect of future assessment years, as the case may be. The next question that arises for consideration is as to whether the conduct of the assessee in keeping the accumulated profits and reserves tied up over a period of years in fixed deposits is consistent with its claim that the amounts were kept back for utilisation in its projects and expansions contemplated by it. Ordinarily, moneys which are not immediately required for any contemplated project or expansion scheme, but nevertheless so as to make available for utilisation within a reasonable short time or as and when the different steps of the project are taken up may be kept in short-term deposits instead of lying idle and in the present case the investments of the funds immediately not required in fixed deposits is not a normal feature. However, the fact remains that the assessee had not distributed the profits and had kept back the same investing it in fixed deposits. When the funds representing the accumulated profits are kept back even though there is no necessity for the same for the current needs of business or any project or expansion in the immediate contemplation of it, it can be consistent with the position that some future plans of expansion or new projects are envisaged to take place though not in the near future, but at appropriate opportune time or as and when the needs of the business dictate and especially when the contemplated or envisaged projects or expansion are likely to take place after a lapse of comparatively long number of years, it is but prudent to make the funds more productive by investment in fixed deposits so that it generates some further finance which will be available for such expansion or new projects. In the facts of this particular case, it is seen that occasions have arisen for the assessee to undertake certain projects referred to earlier including the construction of staff quarters and the project for disposal of the effluent of the distillery in a suitable and appropriate manner for prevention and control of water pollution. We, therefore, hold that the contention of the assessee that it had to build up finance to meet the projects and expansion scheme likely to take place in future and it is towards this purpose that the profits are kept back without distribution and the amount available in respect of the same and also the reserves were invested temporarily in fixed deposits, has good deal of probability.
4. At any rate, the facts remain that the funds representing profits of the company and reserves were retained by it without distribution and had undoubtedly constituted the funds of the assessee's undertaking not immediately required for the current needs of business and this position is indeed not disputed by the learned departmental representative. In the decision of the Calcutta High Court in Phillips Carbon Block Ltd.'s case (supra), the point that arose for consideration was whether the bank deposit was includible in computing the capital of the assessee for the purpose of determining relief under Section 84 of the Act. It was found in that case that the amounts held in deposit, with the bank were part of the circulating capital and were intended to meet the tax liability. It was further noticed in that case that there is no finding that there was any separate business carried on by the assessee or that the assessee had any other unit apart from and distinct from the new undertaking. It was held that notwithstanding the fact that the interest earned was assessed under the head 'Income from other sources', the moneys were entitled to be taken into account for computation of capital employed in the industrial undertaking for the purpose of relief under Section 84. In the Bombay High Court decision in Hindustan Antibiotics Ltd.'s case (supra) also, amounts accumulated out of profits and retained on fixed deposits for future expansion were held to be moneys accumulated for the purpose of business and liable to be included in computing capital for the purpose of relief under Section 80J of the Act. These two authorities clearly, in our view, support the assessee's stand that the amounts held by it in fixed deposits constitute part of its capital employed in its undertaking of manufacture of liquor. If that is the position then it follows that any income or profits generated by such funds employed in the undertaking of the assessee partake the character of profits and gains derived from such undertaking. However, reliance is placed on behalf of the department on the decision of the Kerala High Court in Collis Line (P.) Ltd.'s case (supra). In that case interest earned on deposits in a bank by a shipping company was held to be incidental to the main purpose of deposit which was safe-keeping and not earning of profit. In that case it was claimed on behalf of the company that the interest constituted business income because one of the objects of the company was to lend money and invest and deal with money. It was held that such a contention was not raised and the investment, as found by the Commissioner, was only to secure the money which was lying idle. In our view, the ratio of the decision will not be applicable to the present case because the facts found and the contentions raised were somewhat different. In the present case before us it is not that the money was deposited for safe-keeping or securing it. The money was kept back for the purpose of utilisation in the projects or expansion of the business undertaking of the assessee as and when occasion arise and as it was likely to take same time, it was considered prudent to make it grow meanwhile by the amount of interest earned on fixed deposit which was one of the prudent ways of holding the funds of the undertaking profitably. In such a situation the interest earned should, in our view, be held to arise in the course of the carrying on of the business of the undertaking of the assessee and incidental thereto. Indeed, the learned departmental representative did not dispute that the amount of accumulated profits held over represent the funds of the undertaking not immediately required but his contention is that the interest earned thereon cannot be regarded as profits and gains derived from the industrial undertaking as envisaged by Section 80HH. Before we deal with this contention, we may consider the provisions of Section 80HH.This section states that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking ... , 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 20 per cent thereof. Sub-section (2) stipulates the conditions for being eligible to the relief. It is not material for us to consider this as it is undisputed that the assessee is entitled to the relief under Section 80HH, the only controversy being as to the quantum of such relief. Now it may be seen that the section provides for relief by way of deduction in respect of any profits and gains derived from an industrial undertaking. The learned departmental representative argued that there is a distinction between the expressions 'derived from' and 'attributable to' and also cited two decisions, one of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84 and the other of the Calcutta High Court in CIT v. Sutna Stone & Lime Co. Ltd.  138' ITR 37. In the Calcutta High Court decision it was held that the expression 'attributable to' in Section 80-I of the Act has a wider meaning than the expression 'derived from'. It was also argued by the learned departmental representative with reference to this decision that in order to be entitled to the exemption claimed, the assessee must strictly come within the terms of the provisions providing for exemption. The Calcutta High Court decision in making the distinction between the expressions 'attributable to' and 'derived from' has referred to the Supreme Court decision in Cambay Electric Supply & Industrial Co. Ltd.'s case (supra). In the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd.'s case (supra), the question arose as to whether the balancing charge under Section 41(2) of the Indian Income-tax Act, 1922, could be held to be part of the profits and gains of business of generation and distribution of electricity of the assessee. It is in this context that their Lordships considered the two expressions 'attributable to' and 'derived from'. It is to be seen that Section 80E of the Act considered in that decision provided for relief by way of deduction in respect of profits and gains attributable to the business of generation and distribution of electricity or any other form of power, etc. The expression used is 'profits and gains attributable to the business of.... Now there is a distinction between this expression and the expression used in Section 80HH. Section 80HH speaks in the first part thereof of any profits and gains derived from an industrial undertaking. It is to be noted that the same section also refers to the business of a hotel in the later part. Again, Section 80HHB of the Act providing for deduction in respect of profits and gains from projects outside India speaks of 'any profits and gains derived from the business of.... In Section 80HHA of the Act relief is contemplated in respect of profits and gains derived from a small scale industrial undertaking, etc. Section 80-I again provides for relief in respect of any profits and gains derived from an industrial undertaking, etc. Therefore, two distinct and different expressions are apparently deliberately used. There is no definition of 'industrial undertaking' in the provisions of the Act, though there is one with regard to small scale industrial undertaking. Therefore, the expression 'industrial undertaking' has to be given the normal meaning. The term 'undertaking', according to us, envisages not only the activity of manufacture or production of goods or articles but the entire set up including all the paraphernalia, the various assets, liabilities, i.e., the entire set up with which the business of manufacture or production of goods is carried on. Therefore, cash resources not immediately flowed back in the day to day operations, but nonetheless forming part of the undertaking is also a constituent part of the undertaking. When thus viewed, it is obvious that the income generated by way of interest on deposits of money held as part of the industrial undertaking is nothing but an ingredient of the profits and gains derived from such undertaking. It does not make any difference as to whether any such item of income is assessed under the head 'Profits and gains of business or profession' or under the head 'Income from other sources'.
The fact remains that it is income derived from the industrial undertaking and it is comprehended by the expression 'profits and gains of the undertaking' and it need not necessarily arise by way of any surplus arising from purchase and sale of any commodity or article or by way of excess of the sale price over the cost of any such article or commodity. We are, therefore, satisfied that even if the interest income derived by the assessee cannot be strictly referable to the business or activity of manufacture of liquor and has no direct nexus thereto, it can still be regarded as profit or gain derived from the undertaking as a whole. Every income, profit or gain to be derived from the undertaking need not necessarily be directly relatable to the operation of manufacture and sale of the particular commodity or articles dealt in by the assessee. If, for instance, the assessee receives money by way of interest on the delayed payment of the sale price from the customers of goods supplied by it, could it be said that such interest does not arise by way of profits and gains of the business undertaking of the assessee In our view, it will be certainly referable to the business undertaking carried on by the assessee and, therefore, eligible to whatever relief the other profit directly attributable to the manufacturing operations are eligible. For all the reasons considered above, we uphold the assessee's claim and direct deduction under Section 80HH on the amount derived by it by way of fixed deposits in this case.