Commissioner Of Income-Tax v. Flender Macneill Gears Ltd.

Satish Chandra, C.J:— This reference relates to the assessment year 1972–73. The assessee-company manufactures gears. It is not disputed that it is a priority industry and is entitled to relief under s. 80-I of the I.T Act. Under this section it is entitled to deduction of an amount equal to eight per cent, of the profits and gains “attributable to” a priority industy. The assessee-company granted sole distributorship of its products to M/s. Macneill & Berry Ltd. One of the terms of the agreement was that the distributor shall be allowed 12½% discount on all net sales but bills should be settled within 60. days. In the event of delay, the assessee-company was entitled to charge interest from the distributor. During the assessment, year 1972–73, an amount of Rs. 1,10,000 accrued as interest to the assessee-company from the distributor under the aforesaid clause. The ITO held that this amount of Rs. 1,10,000 was not the asses-see's business income but was income from other sources. Accordingly, relief under s. 80-I was disallowed.

2. The AAC, however, upheld the assessee's claim for relief. The view of the AAC was also upheld by the Tribunal. At the instance of the Revenue; the Tribunal has referred the following question of law for our opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the interest of Rs. 1,10,000 received from M/s. Macneill & Berry Ltd., in pursuance of the distributorship agreement entered into by the assessee with the said company for the sale of goods manufactured by the assessee amounted to profits and gains attributable to priority industry within the meaning of s. 80-I of the I.T Act, 1961, and in that view holding that relief under the said section was available in respect of such interest?”

3. The substance of the matter is whether the amount of interest earned by the assessee-company under the aforesaid agreement with its distributor was profits and gains attributable to the priority industry, in other words, whether that was part of the business income.

4. From a perusal of cl. 13 of the agreement it is apparent that the interest was payable for delayed payment of the bills. If the bills of the assessee-company were paid within 60 days, no amount was payable as interest on the amount of the bills. The interest was hence chargeable to facilitate prompt payment of its bills.

5. The agreement shows that the assessee-company was entitled to charge interest at the prevailing rate of interest chargeable on its overdraft account by its bankers. It was also provided that under certain conditions, the payment of interest may be relaxed by mutual consent.

6. These provisions in the agreement indicate that the amount of interest was relatable directly to the earning of profits and gains by the assessee-company. It was hence “attributable to” the earning of profits and gains of the business of the assessee-company which is admittedly a priority industry. In our opinion, the Tribunal was right in taking the view that the assessee-company was entitled to relief under s. 80-I.

7. Learned counsel for the Revenue invited our attention to the case of CIT v. Universal Radiators Private Ltd., [1981] 128 ITR 531 (Mad). There the question was whether the income earned by the assessee from fixed deposit was part of the business income and the submission was negatived and, in our opinion, quite rightly. That is a case of application of income already earned by the assessee and it is not on a question of accrual of income. The case is clearly distinguishable. The case of Indian Aluminium Co. Ltd. v. CIT, [1980] 122 ITR 660 (Cal), relied on by the learned counsel for the Revenue, is also on the same footing and is, therefore, distinguishable.

8. We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the Revenue. Parties will pay and bear their own costs.

Suhas Chandra Sen, J.:— I agree.