Syed Shah Mohammed Quadri:— The applicant in these applications, under section 245 Q(1) of the Income Tax Act, 1961 (for short the “Act”), is common. It is a Central Government Public Sector undertaking engaged in the business of manufacturing and marketing of nitrogeneous fertilizer. The applicant was incorporated on 22 August, 1974. Initially, the object of setting up of the company was implementation of two fertilizer plants based on gasification technology at Bhatinda in Punjab and Panipat in Haryana. However, in 1978 fertilizer plants at Nangal, run by Fertilizer Corporation of India, were also transferred to the applicant. In these applications we are concerned with the Fertilizer plant in Vijaipur, District Guna, which was entrusted to the applicant to execute the country's first inland gas based fertilizer project. The applicant has a Corporate office and Marketing division at Noida. The role of the corporate office is to manage all activities relating to corporate affairs which includes statutory compliance with the Companies Law, Income Tax Law and co-ordination between Ministry and government agencies. The role of Marketing division is to promote the products of the company and to handle trading of the products which are not manufactured by the company. The expenses incurred by each of the division are accounted for initially in the respective divisions and they are debited to each of the unit including Vijaipur. In the same manner expenses incurred in the corporate office and marketing office are also accounted for in the respective divisions. As a policy the company prepares consolidated accounts at the year end and all the expenses incurred in the corporate office as well as marketing divisions are transferred to four units including Vijaipur unit in the ratio of installed capacity of each of these plant. It is worth noticing that the expenditure incurred by the corporate office as well as the marketing office is not directly relatable to any of the units. In preparing the profit and loss account for the purpose of claiming deduction under section 80-I, all income and expenditure allocated by the corporate office and marketing division to the Vijaipur unit are also taken into account. The controversy in these applications relates to assessment years 1995-1996 and 1996-1997. While AAR/532/2001 is in respect of the assessment year 1995-1996, AAR/533/2001 relates to the assessment year 1996-1997. The grievance of the applicant is that the assessing officer objected to certain items of income but did not exclude corresponding expenditure while computing profits of Vijaipur unit for the purpose of deduction under section 80-I of the Act. It is stated that pursuant to the direction of the Committee on Dispute (COD) the applicant approached the authority seeking rulings on the following questions:—
(1) Whether interest of Rs. 7,22,506/- earned on deposit with M.P Electricity Board qualifies for deduction u/s. 80-I of the Income-tax Act, 1961?
(2) Whether expenses of Rs. 2,76,03,364/- and of Rs. 12,12,74,426/- allocated by marketing office and Corporate office and interest expenditure of Rs. 1,65,99,045/- allocated by corporate office should be excluded from the debit side of the profit & loss account for working out the profits of the Industrial Undertaking for the purpose of deduction u/s. 80-I of the Income-tax Act, 1961 since the allocated interest income from Corporate office, Rs. 5,22,94,939/- credited to profit and loss account of Vijaipur Unit has been excluded for the purpose of deduction u/s. 80-I.
(3) Whether the following incomes credited to P&L account of the industrial undertaking and held by the Assessing Officer as not derived from the Industrial Undertaking, for the purpose of working out deduction u/s. 80-I, should not be excluded from its profits to the extent of expenses incurred for earning these incomes and debited to Profit and Loss account.
S. No.
Name of the item
Income included under the head ‘other income’
1.
Interest on bank deposit
13,30,480/-
2.
Interest on others
57,86,115/-
3.
Hire charges of construction equipment
3,97,746/-
4.
Hire charges of heavy vehicles
24,713/-
5.
Medical charges
2,77,011/-
6.
Sale of scrap
8,39,021.
(4) Whether question u/s. 80-I is to be allowed on a further sum of Rs. 51,51,289/- on account of other miscellaneous income?
Questions (1), (2) and (4) in AAR/533/2001 are similar to the aforementioned question except, the fact that amounts in them are different. In so far as question no. 3 is concerned while there are 6 items in AAR/532/2001, there are only 2 items in AAR/533/2001. We shall advert to those facets presently.
2. The Commissioner of Income Tax forwarded his comments to the applications, stating that the applicant raised two types of questions. In the first category fall questions (1), (3) and (4) which relate to claim of deductions on various types of income which may be attributable to but are not derived from the eligible industrial undertaking; question(2) which involves exclusion of certain expenditure for the purpose of arriving at permissible deductions under section 80-I, falls in the second category. The assessee failed to show that the income from various sources could be said to be derived from the industrial undertaking. The legislature had earlier used the expression “attributable to” but later that was changed to “derived from”. These expressions were interpreted by the High Courts as well as the Hon'ble Supreme Court holding that “derived from” is used in a restricted meaning as opposed to the expression “attributable to”. The claim of the assessee in regard to question no. 2 is that since interest income has been included for the purpose of working out permissible deduction under section 80-I, various items of expenditure allocated to the industrial undertaking are also to be excluded. The interest income has been excluded because it is not derived from industrial undertaking but the claim that the interest expenditure as also other expenditure should also be excluded is based on an incorrect assumption that such expenditure is invariably linked to the interest income. The claim of the expenditure is not linked to earning of interest income. These are old issues. In the assessment year 1994-1995, the claim was disallowed and the order was confirmed by the CIT which the assessee accepted and settled the outstanding tax through Kar Vivad Samadhan Scheme (KVSS).
3. Since the controversy in these applications centres round section 80-I of the Act, it will be useful to read this provision, in so far as it is relevant for our purpose:—
Section 80-I
(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 assesses, being a company, the provisions of this sub-section shall have effect “twenty five per cent” had been substituted.
Notwithstanding anything which 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 1 day of April, 1990 [but before the 1 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) to (5) xxxxxxx
(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of 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 the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent year, be computed as if such industrial undertaking or ship or the business of the hotel [or the business of repairs to ocean-going vessels or other powered craft] were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
The import of sub-section(1) read with the proviso thereto, noted above, is that where the gross total income of a company includes any profit and gains derived from an industrial undertaking covered by the section, a special deduction amounting to 25% of the profits and gains of the industrial undertaking shall be allowed in computing the total income of the assessee. Sub-section (6) of section 80-I commences with a nonobstante clause and provides that despite anything contained in other provisions of the Act, in the case of profits and gains of an industrial undertaking to which sub-section (1) applies, the quantum of special deduction under the said sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent year has to be computed as if such industrial undertaking were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made. This aspect has also been clarified in CBDT Circular No. 281 dated September 22, 1980.
It may be noted that section 80-I of the Act is a beneficial provision and the special deduction allowed thereunder is in addition to the deductions permissible under other provisions of the Act. Since the special deduction is linked to the ‘profits and gains’ of the industrial undertaking, the expression ‘derived from an industrial undertaking’ was sought to be interpreted as anything connected with the undertaking to boost up income/profits and gains of such undertaking by increasing items/quantum of elementary/reducing deductions to avail maximum benefit under the section. It will be useful to notice here that the expression ‘derived from’ was interpreted by the Hon'ble Supreme Court in Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, [237 ITR 579] (1). Thus: “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 instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking”.
Question no. (1), referred to above, relates to interest on deposit with the M.P Electricity Board.
Mr. Ved Kumar Jain who appeared for the applicant fairly conceded that in view of the judgements, the point is covered against the applicant by the judgements in the following cases:—
1. Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, [237 ITR 579] (1).
2. Pandian Chemicals Ltd. v. Commissioner of Income Tax, (262 ITR 278 SC) (2)
Ms. Shumana Sen, DCIT, for the Commissioner had taken the same plea.
In view of the above position we conclude on question no. 1 in AAR/532/2001 that interest of Rs. 7,22,506/- and on question no. 1 in AAR/533/2001 that interest of Rs. 7,05,191/- earned on deposit with MP Electricity Board, do not qualify for deduction under section 80-I of the Act.
Question no. 2 in AAR/532/2001 relates to expenses of Rs. 2,76,03,364/- and Rs. 12,12,74,426/- (it is stated that the correct figure is Rs. 11,02,56,561/-) allocated by marketing office and corporate office respectively. In addition interest expenditure of Rs. 1,65,99,045/- is also allocated by the corporate office. In both the applications for the purpose of deduction under Sub-section (6) of section 80-I, the said items of expenditure are sought to be deducted on the sole ground that interest income allocated from the corporate office amounting to Rs. 5,22,94,939/- credited to the profit and loss account of Vijaipur Unit has been excluded from computation for arriving at correct figure of special deduction. It is not possible to accede to the plea that since the interest income is deleted the aforementioned expenditure should also be deleted.
It has not been disputed by the applicant in the statement of facts that the aforementioned amounts were transferred to various units including Vijaipur industrial unit, though the expenditure incurred by the corporate office as well as marketing office, are not directly relatable to any of the units. It is admitted that while preparing the profit and loss accounts for the purpose of claiming exemption under Section 80-I of Act, all income and expenditure as allocated by the corporate office and marketing division though not directly relatable to the Vijaipur unit, were taken into consideration. The transfer of expenditure to Vijaipur unit is said to be on the basis of the installed capacity as per the practice which was being followed. Therefore, the income and expenditure transferred by the corporate office and the marketing office to Vijaipur unit ignoring the fact that for the purpose of claiming the exemption under section 80-I, it is only income derived from the industrial undertaking that has to be reckoned in computation as such the income and expenditure which are not directly relatable to Vijaipur unit cannot but be ignored. In view of this position, the expenditure allocated by the corporate office and the marketing division ought to have been excluded from the debit side of the profit and loss accounts for working out the profits of industrial undertaking for the purpose of computing special deduction under section 80-I. In regard to question no. 1, it was conceded that the said interest income did not qualify for deduction under section 80-I, it, therefore, follows that the allocation of interest expenditure from corporate office is untenable.
Question No. 3 in AAR/532/2001
Whether the following incomes credited to P&L account of the industrial undertaking and held by the Assessing Officer as not derived from the Industrial Undertaking, for the purpose of working out deduction u/s. 80-I, should not be excluded from its profits to the extent of expenses incurred for earning these incomes and debited to Profit and Loss account.
S. No.
Name of the item
Income included under the head ‘other income’
1.
Interest on bank deposit
13,30,480/-
2.
Interest on others
57,86,115/-
3.
Hire charges of construction equipment
3,97,746/-
4.
Hire charges of heavy vehicles
24,713/-
5.
Medical charges
2,77,011/-
6.
Sale of scrap
8,39,021.
Question No. 3 in AAR/533/2001
S. No.
Name of the item
Income included under the head ‘other income’
1.
Hire charges of machinery
3,80,367/-
2.
Income from Railway siding
7,18,245/-
In so far items no. 1 & 2 in AAR/532/2001 are concerned, they relate to interest on bank deposit and on other deposits. In view of the judgement of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. Commissioner of Income tax (2) supra, these items are to be excluded. There is unanimity on this point. Items 3 & 4 relate to hire charges of construction equipment and hire charges of heavy vehicles respectively received by the Vijaipur industrial unit. Bearing in mind the principle laid down by the Hon'ble Supreme Court in Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [supra (1)], we conclude that these items of income cannot be said to be “derived from” Vijaipur unit, therefore, they ought to be excluded. Item no. 5 is income of Rs. 2,77,011/- recovered from the employees as medical charges spent on them over and above their eligibility. Mr. Jain argued that the amount recovered from the employees would go to reduce the amount already spent by the industrial undertaking on its employees. Similar argument was put forth in regard to income received by the sale of scrap, which is item (6). Ms. Shumana fairly submitted that if the applicant could satisfy the concerned Assessing Officer (AO) by showing corresponding entries in the books of account of medical charges spent on the employees and the amounts spent on goods of which the scrap under consideration was sold, such items would not be excluded.
Adverting to question no. 3 in AAR/533/2001, there are two items — (1) and (2) — as could be seen from above table. For the reasons mentioned above in regard to items (3) and (4) in AAR/532/2001, the exclusion of these two items for the purpose of working out deduction under section 80-I of the Act, cannot be said to be incorrect.
Question No. 4 in AAR/532/2001
The sum of Rs. 51,51,289/- mentioned in question no. 4 represent aggregate of 12 items specified in application against S. No. 8 under the head “name of the item miscellaneous income”. In respect of these items of income, the same submission was made by Mr. Jain as was urged in regard to items (5) and (6) of question no. 3 discussed above. Ms. Shumana reiterated her submission that if the applicant satisfies the concerned Assessing Officer (AO) by showing the corresponding expenditure entries in the books of account, the same will be included in computing special deduction under section 80-I. We record her submission.
In light of above discussions we rule on:—
(1) question no. 1 in AAR/532/2001 that interest of Rs. 7,22,506/- and in AAR/533/2001 of Rs. 7,05,191/-, earned on deposits with MP Electricity Board do not qualify for deduction under section 80-I of the Income Tax Act, 1961.
(2) question no. 2 in AAR/532/2001 that the expenses of Rs. 2,76,03,364/- and Rs. 12,12,74,426/- (it is stated that the correct figure is Rs. 11,02,56,561/-) allocated by marketing office and corporate office and interest expenditure of Rs. 1,65,99,045/- allocated by the corporate office and on question no. 2 in AAR/533/2001 that expenses of Rs. 2,56,44,186/- and of Rs. 12,94,59,292/- allocated by corporate office and marketing office and interest expenditure of Rs. 8,49,30,952/- allocated by corporate office should be excluded from the debit side of the profit and loss account of the industrial undertaking for the purpose of deduction under section 80-I of the Income Tax Act, 1961; the fact that the allocated interest income from corporate office Rs. 5,22,94,939/- and Rs. 3,97,44,811/- credited to profit and loss account of Vijaipur unit in the assessment years 1995-1996 and 1996-19191997 is of no consequence as both interest income and interest expenditure are liable to be excluded for the purpose of deduction under section 80-I of the Act.
(3) question No. 3 in AAR/532/2001 as follows:
S. No.
Name of the item
Income included under the head ‘other income’
Ruling
1.
Interest on bank deposit
13,30,480/-
Should be excluded
2.
Interest on others
57,86,115/-
Should be excluded
3.
Hire charges of construction equipment
3,97,746/-
Should be excluded
4.
Hire charges of heavy vehicles
24,713/-
Should be excluded
5.
Medical charges
2,77,011/-
Liable to be re-considered by the AO in light of above discussions.
6.
Sale of scrap
8,39,021.
Liable to be re-considered by the AO in light of above discussions.
question No. 3 in AAR/533/2001 as follows:
S. No.
Name of the item
Income included under the head “other income’
Ruling
1.
Hire charges of machinery
3,80,367/-
Should be excluded
2.
Income from Railway siding
7,18,245/-
Should be excluded
(4) question no. 4 that allowing deduction under section 80-I on further sum of Rs. 51,51,289/- in AAR/532/2001 and Rs. 1,21,33,914/- in AAR/533/2001 on account of miscellaneous income detailed in column 8 of the applications will abide the result of reconsideration by the Assessing Officer of each item, in light of above discussions, as represented by Ms. Shumana, DCIT before the Authority.