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Commissioner of Income-tax, Tamil Nadu-v Vs. Universal Radiators P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 415 and 452 of 1976 (Reference Nos. 324 and 325 of 1976)
Judge
Reported in[1981]128ITR531(Mad)
ActsIncome Tax Act, 1961 - Sections 41(2), 80B(7), 80E and 80-I
AppellantCommissioner of Income-tax, Tamil Nadu-v
RespondentUniversal Radiators P. Ltd.
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateT.V. Balakrishnan, Adv.
Excerpt:
.....priority industry - sections 41 (2), 80b (7), 80e and 80-i of income tax act, 1961 - assessee was priority industry - priority industry entitled to certain percentage of relief from gross profit - assessee claimed interest income from bank deposits as part of gross profit attributable to priority industry - in view of language of section 80-i only those incomes can be considered part of gross profit which are attributable to business of priority industry - income earned must have nexus with business of priority industry - in view of facts and circumstances interest income from bank deposits had no nexus with business carried on by priority industry - interest income cannot be considered as gross profit of priority industry for purpose of claim of relief under section 80-i. - - if..........consider the rent received by the assessee on the lease of machinery and examine whether it is income attributable to the priority industry, coming within the scope of s. 80-i of the act. this section was deleted with effect from 1st april, 1973. at the relevant time, when the section was in operation, it ran as follows : 'deduction in respect of profits and gains from priority industries in the case of certain companies. -(1) in the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income.....
Judgment:

Sethuraman, J.

1. The Appellate Tribunal has referred the following question under s. 256(1) of the I.T. Act, 1961 :

'1. Whether, on the facts and in the circumstances of the case, Rs. 33,333 received by the assessee as rent for lease of its machinery, Rs. 5,661 being the export incentive received by the assessee from the Government of India and Rs. 15,780.80 received by the assessee from Canara Bank as interest on the deposit of money could be treated as profit attributable to priority industry and would qualify for deduction under section 80-I of the Income-tax Act, 1961, for the assessment year 1970-71

2. Whether, on the facts and in the circumstances of the case, Rs. 60,000 received by the assessee as rent for the lease of its machinery, Rs. 67,681 being the export incentive received by the assessee from the Government of India and Rs. 38,839.70, being the interest received by the assessee from Canara Bank on the moneys deposited therein, could be treated as profit attributable to the priority and would qualify for deduction under section 80-I of the Income-tax Act, 1961, for the assessment year 1971-72 ?'

2. The assessee was incorporated as a company which took over all the assets and liabilities of a firm carrying on business in the manufacture and sale of radiators, oil coolers, heat exchangers and other automobile accessories with effect from 1st June, 1969. It closed its accounts for the first time on 31st March, 1970, and thereafter at annual intervals on 31st March. The two assessment years under consideration are 1970-71 and 1971-72. The assessee declared in its return Rs. 3,32,675 and Rs. 5,74,242 as its assessable income for the assessment years 1970-71 and 1971-72, respectively, and claimed relief under s. 80-I of the Act for the both the assessment years.

3. The ITO computed the business income for the assessment year 1970-71 at Rs. 3,58,589 and for 1971-72 at Rs. 6,23,131. Included in these amounts are the following three items, namely, (1) Rs. 33,333 and Rs. 60,000, being the amounts received in the two years by leasing the machinery ; (2) Rs. 32,926 and Rs. 47,157, being the interest received on deposits with banks and others in the two years ; and (3) Rs. 5,661 and Rs. 67,681, being the export incentive received by the assessee in the two years. The ITO granted relief under s. 80-I with reference to these three sets of amounts also.

4. The Additional Commissioner of Income-tax considered that the ITO had acted prejudicially to the revenue in taking these time of income as attributable to the priority industry, and in giving the relief under s. 80-I of the Act. Accordingly, after giving the assessee the necessary opportunity, he came to the conclusion that the assessee was not entitled to the deduction under s. 80-I of the Act in respect of the three sets of amounts given above for each of these two years. The assessee thereafter preferred appeals before the Appellate Tribunal. After examining the materials and the contentions, the Appellate Tribunal observed that the machinery belonging to the assessee had been leased out to M/s. Madras Radiators and Pressings P. Ltd., that the directors of the said company had resolved to pay Rs. 40,000 per annum to the assessee for the use of its machinery for the assessment years 1970-71 and Rs. 60,000 per annum for the assessment year 1971-72 and that such machinery had been leased out by the assessee to the said company to enable the later to manufacture certain components which are automobile accessories. There were also payments made to the lessee by the assessee for making those components used as accessories for automobiles available to it. It was, therefore, held that the income derived by the assessee by way of rent for the lease of the machinery was to be treated as profits attributable to the priority industry and that it would qualify for the deduction under s. 80-I of the I.T. Act.

5. As regards the incentives received from the Government, the Appellate Tribunal pointed out that these incentives had been paid in pursuance of a scheme formulated by the Government for promoting the export of engineering goods manufactured in India and in order to reimburse the loss suffered by the exporters by reason of their exporting at a lesser price than would be obtained if the goods were sold in India.

6. As regards the interest received form the bankers and other parties it was found that the assessee had placed Rs. 11,00,000 in fixed deposit with Canara Bank and that the assessee had borrowed from the said bank Rs. 4,50,000 as on March 31, 1970, and Rs. 5,81,255 as on March 31, 1971. The borrowing was said to be for business purposes. The interest on such borrowings had been allowed as a deduction. In the view of the Tribunal, the making of the deposit and the borrowings on the security of the deposits showed that they could be treated as part of the assessee's business and that, consequently, the interest received on such deposits from the bank was to be treated as profits attributable to the priority industry. It is in this view that the ITO's action in granting the relief under s. 80-I of the Act in respect of the three amounts for the two years was considered to be proper. The Commissioner has challenged these conclusions of the Appellate Tribunal in the form of the questions set out already.

7. We shall take up each of the three amounts covered by the questions separately. We shall first consider the rent received by the assessee on the lease of machinery and examine whether it is income attributable to the priority industry, coming within the scope of s. 80-I of the Act. This section was deleted with effect from 1st April, 1973. At the relevant time, when the section was in operation, it ran as follows :

'Deduction in respect of profits and gains from priority industries in the case of certain companies. -(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company....'

8. There are two other sub-sections to s. 80-I of the Act, and it is not necessary to extract them here. The section would apply where the gross total income included any profits and gains attributable to any priority industry. When once the operation of this section is attracted, then there has to be an allowance by way of deduction from the profits attributable to the priority industry, an amount equal to eight per cent. of such profits in computing the total income. Therefore, the point that requires scrutiny is, whether the rent received from the lease of the machinery used in the priority industry is a profit attributable to the priority industry.

9. It is not in dispute that the product manufactured by the assessee comes within the scope of the 6th-Schedule to the Act as it was in force at the relevant time. The term 'priority industry' has been defined in s. 80B(7) of the Act as meaning, among others, manufacture or production of any one or more of the articles or things specified in the list in the 6th Schedule. The said Schedule thus describes such of those articles or things the manufacture of which would constitute a priority industry. Item (20) describes automobile ancillaries as one of the articles and things, the manufacture of which would constitute a priority industry. It is not in dispute that the assessee was manufacturing automobile ancillaries before the factory was leased out and even after leasing out, the factory was producing the same articles. The question is, whether the rent received would, on these facts, be profits attributable to the priority industry.

10. The expression 'attributable to' occurring in a similar provision in the same Act came to be considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) . In that case, the assessee was running a priority industry. It had certain machinery which was sold. The balancing charge as result of the sale of the machinery was brought to tax under s. 41(2) of the Act. The question was, whether the amount so brought to tax could be treated to be profits attributable to the priority industry so as to be eligible for exemption or relief contemplated by s. 80E which corresponds to s. 80-I of the Act, now under consideration. In construing the expression attributable to', the Supreme Court pointed out at a page 93 :

'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 expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than 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 receipts from sources other than the actually conduct of the business of generation and distribution of electricity.'

11. It is clear from the passage given above that the term 'attributable to' is wider that the term 'derived from'. We have thus to find out whether the profit is ascribable to the running of the priority industry. There is nothing in the provision which requires that the assessee alone should run the priority industry. It may be that on account of business exigencies the assessee, instead of directly running the factory, my lease it to another and purchase the end product. So long as the end product is manufactured in the factory, the manner in which the business is carried on is not really material. The assessee may run the industry himself or may have it run by another. He may appoint a manager, for instance, and run the business. He may lease it out. So long as the factory manufactures the products coming within the list of articles and things in the Sixth Schedule, the Assessee would be eligible for the relief under s. 80-I of the Act, as the profits derived from the factory either by lease or otherwise would be attributable to the priority industry. The assessee must have something to do with the factory and the income earned must have nexus with the priority industry. If these attributes are satisfied, then the assessee would be eligible for the concession under s. 80-I of the Act.

12. The last sentence in the passage from the Supreme Court's judgment extracted above cannot be understood to mean that any income received from sources other than the actual conduct of the business of the priority industry would qualify for the relief, however remote the connection of such income may be. This passage has to be understood in the sense that it would envisage the relief being granted in all cases where there is some direct nexus between the income and the priority industry. The nature of the source would be immaterial. For instance, in the present case, even if the income from the lease of the factory had been assessed under the head 'Other sources', the above passage would support the view that it is eligible for the concession. It is in that sense that the last sentence of the Supreme Court's judgment has to be understood.

13. The learned counsel for the Commissioner contended that the source or receipt by the assessee was only the lease amount and that it cannot have anything to do with the priority industry contemplated by s. 80-I of the Act. The source cannot be divorced from its origin, namely, the factory in the present case. As the factory is producing the automobile ancillaries, the income either by way of rent or by direct manufacture would qualify for the relief under s. 80-I of the Act. The result is that the rental income would have to be taken as eligible for the relief under s. 80-I of the Act.

14. We would now take up for consideration the amount derived by the assessee as and by way of export incentives. From the statement of facts given above, it would be clear that this incentive has been given to the assessee in order to make good the loss that arose to it by reason of the export fetching a lower price than what the assessee would have obtained if the products had been sold in India. The export incentive is thus bound up with the manufacture and sale of automobile ancillaries and is, therefore, attributable to the business of priority industry. The amount of incentives would, therefore, qualify for the relief under s. 80-I of the Act.

15. The last item to be considered is the interest earned by the assessee from the fixed deposit with the Canara Bank. It had also derived interest on deposits from other banks, etc., as well as from the Tamil Nadu State Electricity Board Bonds. With references to the rest of the items, the denial of the relief under s. 80-I of the Act is not in dispute. It is only with reference to the interest received from the Canara Bank on the fixed deposit that the assessee claims that such interest should be attributed to the priority industry and should qualify for the relief envisaged by s. 80-I of the Act. The connection between the fixed deposit and the priority industry is stated to be that the amount was found to be surplus in the assessee's hands and it was, therefore, invested in the bank and that thereafter when the assessee wanted money from the bank, on the security of the said fixed deposit, amounts were lent by the bank. The total amount in the fixed deposit was Rs. 11,00,000 and the assessee had borrowed as on the closing date of each of these two years Rs. 4,50,000 and Rs. 5,81,255.62 respectively.

16. The Appellate Tribunal, in dealing with this claim of the assessee, has observed as follows :

'Such borrowing was obviously for business purposes and the interest paid by the assessee on such borrowing had been included in the expenditure. The interest referred to above was interest received by the assessee from the said bank on such fixed deposit. (The above details are apparent from the balance-sheet of the assessee as on March 31, 1970, and March 31, 1971). In these circumstances, the making of the deposit and the borrowing of the moneys on the same fixed deposit can be treated as part of the assessee's business. The result is, the income received from the bank by way of interest on such fixed deposit can be said to be attributable to the profits of the priority industry.'

17. The Appellate Tribunal seems to have missed the real point that arises in this case. The real question is, whether the interest derived from the deposit is attributable to the priority industry. The surplus funds, whenever deposited, in the bank were clearly not required for the priority industry and that is how it came to be kept in a fixed deposit for a term. If nothing more had happened, the fixed deposits could only be taken as originating from the funds not required by the priority industry. Its connection with the priority industry would only be remote.

18. As and when the assessee required moneys, it approached the bank for loans. It was at that stage that the bank took this fixed deposit as security for the loans. We are, however, concerned with the deposit having nexus with the priority industry at the stage at which the amounts were deposited in the bank and started earning interest. Else, it would be enough for an assessee to offer as security all his properties and claim the entire amount of income earned from all of them as eligible for the relief under s. 80-I. Such a result could not have been intended. Just as any person can make a fixed deposit in the bank, the assessee also did. For instance, in the present case itself, there were deposits in the Bank of Baroda. The assessee did not get relief in respect of the interest income from the said deposits as attributable to the priority industry, and in our opinion rightly, as there was no connection between the fixed deposit and the priority industry. We have to consider the question of the interest income at the stage at which the deposit was made and the use of the deposit receipt as security does not make the income that of the priority industry.

19. In fact, in a case which arose in this court in Addl. CIT v. Vellore Electric Corporation Ltd. : [1979]119ITR523(Mad) , the question of the character of the interest or its relation to the priority industry came to be examined. That was a case of a company engaged in the distribution of electricity. It had to create a 'contingencies reserve'. The sums appropriated to that reserve had to be invested in approved securities contemplated by the Indian Trusts Act, 1882. The assessee received interest on such investments and claimed the relief as a priority industry in respect of such interest. It was contended by the assessee that since it was a statutory obligation to invest the amount available in the contingencies reserve in an approved security and since it could not carry on the business without complying with statutory obligation, the interest arising from such investment should be considered as attributable to the profits and gains of the priority industry within the meaning of s. 80-I of the Act. This contention was negatived by this court, At page 526, it was pointed out that deduction is possible only in respect of profits and gains arising from the specific activities or business of generation or distribution of electricity or any other form of power and that the immediate source of income in that case was the investment in Govt. securities. It was added (p. 526) :

'In order to attract the provisions of s. 80-I the income should be in the nature of profits or gains arising out of the business of a priority industry. Neither the statutory reserve not the securities in which the amounts have been invested can be considered to be a trading asset of the assessee. Any investment of the contingency reserve, therefore, could not be taken as having a direct relationship or nexus with the business of generating and supplying energy. The interest received on such investment, therefore, could not be considered to be profit or gain attributable to the business of the assessee which alone can be taken into account for the purpose of s. 80-I of the Act.'

20. During the course of the argument there was some debate as to whether this particular passage would have validity after the judgment of the Supreme Court in : [1978]113ITR84(SC) . In the context of the pronouncement of the Supreme Court, the view taken by this court that the profits and gains must arise from the specific activities or business of generation of electricity may have to be reconsidered. As 'attributable to' is wider than 'derived from', the relief is not confined only to the profits of the priority industry strictly so called. It would have a wider ambit. However, the conclusion arrived at in that case is unexceptionable because the character of the interest is different from the character of the income attributable to the priority industry. The result is that in so for as the interest income was concerned, the Tribunal acted erroneously in granting the relief. The questions are answered accordingly. There will be no order as to costs.


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