N.V Balasubramanian, J.:— This reference arises out of an assessment for the assessment year 1979-80, under section 256(1) of the Income-Tax Act, 1961, hereinafter referred to as “the Act”, and the following questions of law have been referred for our opinion:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that factory roads were entitled to depreciation as ‘building’ in the computation of profits from business?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received from SIPCOT would not go to reduce the cost of the assets for the purpose of allowance of depreciation?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on deposit with the Tamil Nadu Electricity Board should be treated as income derived from an industrial undertaking for the purpose of relief under section 80HH?”

2. The assessee is a private limited company engaged in the manufacture and sale of potassium chlorate used in the manufacture of matches. For the assessment year 1979-80, the assessee made a claim of depreciation on factory roads, on the ground that the roads should also be treated as a part of the buildings. The Income-Tax Officer rejected the claim and in the first appeal, the Commissioner of Income-Tax (Appeals) allowed the claim of the assessee. The Appellate Tribunal, on the appeal by the Revenue, following a decision of this court in CIT v. Lucas TVS Ltd. (No. 2), [1977] 110 ITR 346 maintained the order of the Commissioner (Appeals) and as against that part of the order of the Appellate Tribunal, the first question of law has been referred to us. In so far as the second question is concerned, the point involve'd is whether the amount of subsidy received by the assessee from SIPCOT should be taken into consideration in determining the costs of the assets for the purpose of claiming depreciation. The Income-Tax Officer held that the amount of subsidy should be deducted from the cost of theassets. But, the Commissioner (Appeals) as well as the Appellate Tribunal held otherwise. Therefore, the second question of law is referred at the instance of the Revenue.

3. The third question of law relates to the deduction under section 80HH of the Act on the interest earned by the assessee on the deposits made by the assessee with the Tamil Nadu Electricity Board under section 80HH of the Act. The assessee claimed that the interest received by the assessee on the deposits with the Tamil Nadu State Electricity Board is a profit or income derived from the newly established industrial undertaking in backward areas. The Assessing Officer, however, rejected the claim of the assessee on the ground that the interest income cannot be said to be a profit income derived from the industrial undertaking. The Commissioner (Appeals) as well as the Appellate Tribunal held that the assessee had to deposit money with the Tamil Nadu Electricity Board under the requirements of the statute for getting power supply, and the interest incomes earned on such deposit should be treated as business income for the purpose of section 80HH of the Act. Following a decision of the Calcutta High Court in the case of Phillips Carbon Black Ltd. v. CIT, [1982] 136 ITR 205 (Cal), the Commissioner (Appeals) as well as the Tribunal held that the interest income on the deposit made by the assessee in compliance with the Board's regulations for supply of power should also be treated as profit from the industrial undertaking for the purpose of section 80HH of the Act. The above order of the Appellate Tribunal is the subject-matter of this tax case reference.

4. In so far as the first question of law that is referred at the instance of the Revenue is concerned, it is fairly conceded by learned counsel for the Revenue that in view of the decision of the Supreme Court in the case of Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd., [1992] 196 ITR 149, the assessee is entitled to claim depreciation on the factory roads. The Supreme Court in the above case held that the roads laid within the factory should be treated as part of the buildings, and the assessee can claim depreciation on the factory roads. The order of the Appellate Tribunal that the assessee is entitled to depreciation on the roads is in conformity with the decision of the Supreme Court, cited supra and, accordingly, we answer the first question of law referred to us in the affirmative and against the Revenue.

5. In so far as the second question of law is concerned, it is also concluded against the Revenue by a decision of the Supreme Court in Commissioner Of Income Tax, Hyderabad v. P.J Chemicals Ltd.., [1994] 210, ITR 830. Following the decision of the Supreme Court, we answer the second question of law referred to us in the affirmative and against the Revenue.

6. The third question pertains to the interpretation of section 80HH of the Act. The question relates to the eligibility of the assessee to claim deduction under section 80HH of the Act in relation to the interest on the deposit made with the Tamil Nadu Electricity Board. Mr. C.V Rajan, learned counsel for the Revenue, submitted that section 80HH uses the expression, “derived from” and in considering the question whether the assessee would be entitled to claim deduction under section 80HH of the Act, it must be only with reference to the profits and gains derived from the industrial undertaking, the assessee would be entitled to the relief. According to learned counsel for the Revenue, the interest income is derived from the deposit and is not derived from the industrial undertaking and, therefore, the assessee is not entitled to claim deduction on interest on the deposit held in Tamil Nadu Electricity Board as the interest cannot be characterised as profits and gains from the industrial undertaking set up in backward areas. Mr. C.V Rajan, is support of his contention, relied upon the following decisions.

(i) Commissioner Of Income-Tax v. Eastern Seafoods Exports (P.) Ltd., [1995] 215 ITR 64; (ii) Sterling Foods v. CIT, [1984] 150 ITR 292 (Kar); (iii) CIT v. Seshasayee Paper and Board Ltd., [1994] 207 ITR 80 (Mad); (iv) Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC) and (v) Ashoh Leyland Ltd. v. CIT, [1997] 224 ITR 122 (SC).

7. On the other hand, Mr. Janarthana Raja, learned counsel for the assessee, submitted that the assessee has set up an industrial undertaking in the backward area and unless the assessee deposited money with the Electricity Board, it would not be possible for the assessee to get the power to run the industry. He therefore, submitted that the interest income earned by the assessee is closely connected with the business of the assessee and the circumstances under which the deposits were made clearly show that they were made in the course of actual carrying on of business and hence, the interest should also be treated as derived from the industrial undertaking. He further submitted that the interest income should be regarded as business income which arose out of the business transaction and the totality of the circumstances should be seen. He submitted that unless the assessee gets power, it is not possible for the assessee to run the business and hence, the interest income derived is wholly and exclusively connected with the business of the assessee. He strongly placed reliance on decisions of this court in Commissioner Of Income-Tax v. Tamil Nadu Dairy Development Corporation Ltd., [1995] 216 ITR 535, Commissioner Of Income-Tax v. South India Shipping Corporation Ltd., [1995] 216 ITR 651 and, the Calcutta High Court in Phillips Carbon Black Ltd. v. CIT, [1982] 136 ITR 205.

8. The point that arises is whether the interest on deposit with the Tamil Nadu Electricity Board should be treated as income derived from the industrial undertaking for the purpose of deduction under section 80HH of the Act. Section 80HH, in so far as it is material for the purpose of the case, reads as under:

“80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.—(i) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, 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.”

9. It is no doubt true that the assessee made the deposit with the Electricity Board in compliance with the Regulations of the Board for the supply of power. There is also no dispute that the supply of power is essential for running the industry and without the industry being run, the question of profit arising from that undertaking does not arise. It is also true that the assessee has deposited the money out of statutory compulsion to get the necessary supply of power which is vital for running of the industry. In spite of the nexus between the making of the deposit and running of the industry, the question remains whether the interest income earned on such deposit can be said to be derived from the industrial undertaking. The crucial words in the section 80HH of the Act are, “profits and gains derived from the industrial undertaking”. The expression, “derived” has been the subject-matter of consideration before various courts.

10. The Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84, held that the expression, “derived from” should be given a restricted meaning and whenever the Legislature wants to give a wider expression, the Legislature employs the expression, “attributable to” and the use of the expression, “derived from” indicates that the profit or gain should be derived from the conduct of the business. The above decision of the Supreme Court was followed by the apex court in Ashok Leyland Ltd. v. CIT, [1997] 224 ITR 122 wherein the Supreme Court reiterated the distinction between the expression “derived from” and the expression “attributable to” found in section 80-1 of the Act.

11. This court in the case of Commissioner Of Income-Tax v. Eastern Seafoods Exports (P.) Ltd., [1995] 215 ITR 64, after considering the case laws in (i) Agra Chain Mfg. Co. Ltd. v. CIT, 114 ITR. 840 (All); (ii) Bacha F. Guzdar (Mrs.) v. CIT, [1955] 27 ITR 1 (SC); (iii) Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC); ‘(iv) Cochin Company v. Commissioner Of Income-Tax, Kerala, [1978] 114 ITR 822 (Ker); (v) CIT v. Kunwar Trivikram Narain Singh, [1965] 57 ITR 29 (SC); (vi) CIT v. Raja Bahadur Kamakhya Narayan Singh, [1948] 16 ITR 325 (PC); (vii) CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC); (viii) CIT v. Wheel and Rim Co. of India Ltd., [1977] 107 ITR 168 (Mad); (ix) Hindustan Lever Ltd v. Commissioner Of Income-Tax, Bombay City-I., [1980] 121 ITR 951 (Bom); (x) J.K Trust v. CIT/CEPT, [1953] 23 ITR 143 (Bom); (xi) Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308 (SC); (xii) Sm. Lakshmi Daiji v. Commissioner Of Income-Tax*, [1944] 12 ITR 309 (Patna); (xiii) Maharajadhiraja Sir Kameshwar Singh v. CIT, [1961] 41 ITR 169 (SC); (xiv) Maharajhumar Gopal Saran Narain Singh v. CIT, [1935] 3 ITR 237 (PC); (xv) Pethaperu-mal Chettiar (AL. VR. VP.) v. CIT, [1943] 11 ITR 532 (Mad); (xvi) Radhika Mohan Roy Wards Estate, In re, [1940] 8 ITR 460 (Cal); (xvii) Mst. Sarju Bai v. Commissioner Of Income-Tax, [1947] 15 ITR 137 (All) and (xviii) Shardlow India Ltd. v. Commissioner Of Income-Tax, Madras, [1981] 128 ITR 571 (Mad), on the subject which construed the expression, “derived” in various provisions of the Act, held that 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. This court also held that 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 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. This court also held that the expression, “derived from the business” should receive a restricted meaning and it refers to an income directly relatable to the business activities of the assessee. The above view was reiterated by this court in Chola Fish and Farms P. Ltd. v. CIT, [1996] 217 ITR 609.

12. The Karnataka High Court in Sterling Foods v. CIT, [1984] 150 ITR 292 considered the expression, “derived from” in section 80HH of the Act and Jagannatha Shetty J. (as his Lordship then was), speaking for the Bench held that the assessee must establish that his profits and gains were derived from his industrial undertaking or the business of a hotel, and it is just not sufficient, if a commercial connection is established between the profits earned and the industrial undertaking. The Karnataka High Court further held that the industrial undertaking must itself be the source of that profit and the industrial undertaking must directly yield that profit. The Karnataka High Court also held that it must be the direct source of that profit and not a means to earn any other profit. The above view was followed by the Karnataka High Court in the case of CIT v. Siddaganga Oil Extractions Pvt. Ltd., [1993] 201 ITR 968, wherein the Karnataka High Court held that the income from the deposit cannot be regarded as profits or gains derived from the industrial undertaking.

13. Now, let us consider the decision relied upon by learned counsel for the assessee. The decision of the Calcutta High Court in Phillips Carbon Black Ltd. v. CIT, [1982] 136 ITR 205, was not actually dealing with the scope of the expression, “derived” in section 84 of the Act and the question that was considered was whether the deposit with the bank can be regarded as investment. The Calcutta High Court held that the interest income on such deposit can be regarded as business income. There can be no quarrel over the proposition that the interest earned by the assessee on the deposit with the Electricity Board can be regarded as business income. But, the further question is whether that income was derived from the industrial undertaking, but that question was not the subject-matter of consideration before the Calcutta High Court and, therefore, the decision of the Calcutta High Court is not quite apposite to the facts of the case. The decisions of this court in Commissioner Of Income-Tax v. South India Shipping Corporation Ltd., [1995] 216 ITR 651 and in Commissioner Of Income-Tax v. Tamil Nadu Dairy Development Corporation Ltd., [1995] 216 ITR 535 are also not of much help to the assessee as those cases were dealing with the question whether the interest received from the foreign brokers can be taken as business income and this court held that London brokers and the assessee-com-pany were carrying on shipping business of the assessee-company in foreign countries and, therefore, the income derived by way of interest from London brokers would be the income derived for the purpose of section 80J of the Act. Hence, the decisions in South India Shipping Corporation Ltd's case, [1995] 216 ITR 651 (Mad) and Tamil Nadu Dairy Development Corporation Ltd.'s case, [1995] 216 ITR 535 (Mad), both cited supra, are not helpful to the assessee. The decision of this court in CIT v. Seshasayee Paper and Board Ltd., [1994] 207 ITR 80, was dealing with the interest on deposit with the Electricity Board. While considering the question whether such interest would be entitled to deduction under section 80-1 of the Act, this court has held that the assessee would be entitled to claim deduction on the interest income earned as the expression found in section 80-1 was “attributable to” and this court held that the relief under section 80-1 for priority industry is not confined only to the profit income derived from the industry and it has a wider import.

14. This court in the case of CIT v. L.M Van Moppes Diamond Tools Ltd., [1984] 145 ITR 195 held that the cash subsidy received by an assessee would be eligible for the relief under section 80E of the Act and this court was considering the expression, “attributable to” occurring in section 80E of the Act. Similarly, the decision of this court in CIT v. India Pistons Repco Ltd., [1987] 167 ITR 917, is also a case relating to the grant of relief under section 80-1 of the Act with reference to the cash subsidy received and the expression used in section 80-1 of the Act is, “attributable to” and, therefore, this court held that the refund of drawback duty can be regarded as profits and gains attributable to the priority industry. In the above case, this court was construing the expression, “attributable to” occurring in various provisions of the Act and held that the expression “attributable to” has a wider meaning. It is now necessary to notice a decision of the Karnataka High Court in the case of Sterling Foods v. CIT, [1991] 190 ITR 275, wherein the Karnataka High Court has held that the profit on sale of import entitlements is the profits and gains of business or profession by virtue of retrospective amendment of law made in section 28(iiia) of the Act and, therefore, the assessee was entitled to the relief in respect of receipt under section 80HH of the Act. It is significant to notice that the Karnataka High Court noticed the earlier decision of the assessee's own case reported in Sterling Foods v. CIT, [1984] 150 ITR 292 (Kar), and held that by virtue of the retrospective amendment of the law, the earlier decision of that court has no application. In the later case, the Karnataka High Court has not considered the effect of expression, “derived from” occurring in section 80HH of the Act. Therefore, we prefer to follow the earlier decision of the Karnataka High Court in Sterling Foods v. CIT, [1984] 150 ITR 292, wherein the Karnataka High Court construed the expression, “derived from” and held that though the income from the sale of import entitlements is liable to be included in the total income chargeable to Income-Tax, it would not confer any right on the assessee to claim deduction under section 80HH of the Act. It is also profitable to refer to a later decision of the Kerala High Court in the case of A.M Moosa, Bharath Sea Foods v. Commissioner Of Income-Tax, [1997] 224 ITR 735, wherein the Kerala High Court noticed the decision of the Privy Council in CIT v. Raja Bahadur Kamakhya Narayan Singh, [1948] 16 ITR 325 and the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 and an earlier decision of the Kerala High Court in Cochin Company v. Commissioner Of Income-Tax, Kerala, [1978] 114 ITR 822 and held that the scope of expression, “derived from” is more than settled not only by the decision of the Kerala High Court, but by the decisions of the Supreme Court and Privy Council. The Kerala High Court held that the profit realised from the sale of the export house premium and from the sale of the import premium cannot be said to be derived from the business activities with reference to industrial undertaking.

15. A study of various case laws clearly indicates that a restricted meaning is given when the Legislature uses the expression, “derived from”. Though the assessee has necessarily to make the deposit with the Electricity Board for running the industry and the power supply will not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board cannot be said to have been derived from the industrial undertaking. The immediate source of interest is the deposit itself, and the effective source of the genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. Hence, the interest income cannot be held to be derived from the industrial undertaking. In other words, the immediate and effective source of the interest is the deposit and not the industrial undertaking. In addition, as held by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84, the profits or gains eligible for deduction under section 80HH of the Act must be derived from the actual conduct of the business, and Unless the profits or gains are derived from the actual conduct of the business, it cannot be stated that the interest is derived from the industrial undertaking. In other words, the industrial undertaking must directly yield the profit, and it cannot be the means to yield the income. The deposit might be an incidental investment with the business of the industrial undertaking and that would not be sufficient to render the interest income as profits and gains derived from the industrial undertaking. The fact that the amount was assessable as business income itself would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. In other words, it is not all business receipts that would qualify for the deduction and the Legislature has apparently not intended to give the benefit of deduction to all business income. If the intention of the Legislature was to grant relief to all business income, it could have used the expression, “profits and gains of industrial undertaking”. The fact that the Legislature has used the expression “profits and gains derived from the industrial undertaking” has some significance and it connotes that the immediate and effective source of income eligible for grant of relief under section 80HH of the Act must be the industrial undertaking itself and not any other source. The mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80HH of the Act. Mere commercial connection between the income and the industrial undertaking would not be sufficient. We find no compelling reasons to give a wider meaning to the expression, “derived from” in section 80HH of the Act, as the nature of the provision, intended to give tax deduction, does not warrant a wider meaning being given to the expression, “derived from” in section 80HH of the Act. What appears to have been intended by the Legislature is that the industrial undertaking must be the source of the profits or gains. If the Legislature had intended to grant deduction to any profit from the industrial undertaking, it would have very well used the expression, “attributable to” in section 8QHH of the Act. We, therefore, do not find any justification to give the expression “derived from” a wider meaning to cover every receipt connected with the industrial undertaking. Therefore, we hold that the Appellate Tribunal has committed an error of law in holding that the interest earned on the deposit with the Tamil Nadu Electricity Board by the assessee should be treated as income derived from industrial undertaking for the purpose of the relief under section 80HH of the Act. In the result, we answer the questions of law referred to us as under:

(i) The first question of law in the affirmative and against the Revenue.

(ii) The second question of law in the affirmative and against the Revenue.

(iii) The third question of law in the negative and in favour of the Revenue.

16. In view of the divided success, there will be no order as to costs.