UNIPATCH RUBBER LTD.,DELHI vs. ACIT, CIRCLE- 27(1), NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeals by the same assessee arise out of two

separate orders, both dated 28.09.2018, of learned Commissioner

of Income Tax (Appeals)-9, New Delhi, pertaining to assessment

years 2013-14 and 2014-15.

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to disallowance of deduction under section 80IC of the Income-tax

Act, 1961 (for short ‘the Act’) in respect of interest income.

engaged in the business of manufacturing and sale of tyre and

tube, repair and purchase of allied products. Besides, the

assessee also trades in shares and debentures of companies and

units of mutual funds. For the impugned assessment year, the

assessee had filed its return of income in regular course claiming

deduction under section 80IC of the Act. In course of assessment

proceeding, the Assessing Officer noticing that the assessee has

claimed deduction under section 80IC of the Act, called upon the

assessee to furnish the necessary details. On examining the

details furnished by the assessee, the Assessing Officer found

that the deduction under section 80IC of the Act was claimed in

respect of Nalagarh Unit situated at Himachal Pradesh. On

further verification of audited financial statement, he found that

the assessee has included interest income earned on fixed

deposits in the business profit for computing deduction under

section 80IC of the Act. Therefore, he called upon the assessee to

3 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

explain, why the interest income not being profits of the eligible

business should not be reduced from the profits of the business

for computation of deduction under section 80IC. Alleging that

assessee failed to furnish any satisfactory reply, the Assessing

Officer disallowed assessee’s claim of deduction under section

80IC of the Act in respect of interest income. Though, the

assessee contested the aforesaid disallowance before learned first

appellate authority, however, he did not succeed.

manufacturing the finished products the assessee has to import

raw materials from other States. He submitted, in course of such

import, when the raw materials enter the boundaries of Himachal

Pradesh, wherein the eligible unit has been established, entry tax

is levied. He submitted, there was dispute between the entry tax

authorities and the assessee on the issue of levy of entry tax. He

submitted, keeping in view such dispute, to ensure uninterrupted

non-invasive work of the assessee, with the intervention of the

Hon’ble High Court an arrangement was made through which the

assessee had to secure the entry tax payable by furnishing

security deposits in the form of FDRs. He submitted, since the

4 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

FDRs were made out of the business funds they will come under

the purview of section 80IC benefit. Further, he submitted, the

fixed deposits made for securing part of the entry tax payable

since, had a direct nexus with the manufacturing activities,

interest income earned would be eligible for deduction under

section 80IC of the Act. In support of such contention, he relied

upon a decision of the Hon’ble Madras High Court in case of AVM

Cine Products v. Dy. CIT (2020)421 ITR 431 (Mad)(HC). Thus, he

submitted, assessee’s claim of deduction under section 80IC of

the Act in respect of interest income should be allowed.

the observations of departmental authorities, submitted that

since the interest income earning activity of the assessee is not

directly connected to the manufacturing activity, which is eligible

for deduction under section 80IC of the Act, no such deduction

can be allowed in respect of interest income.

relied upon and perused the materials on record. The crux of the

matter is, whether assessee’s claim of deduction under section

80IC in respect of interest income earned on fixed deposits is

5 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

allowable. Section 80IC of the Act is a special provision in respect

of certain undertakings and enterprises functioning in certain

special category States. It provides that profits and gains derived

by an undertaking or enterprise from manufacture or production

of any article or things as specified in sub-section (2) of the said

provision shall be eligible for deduction on fulfillment of certain

conditions enshrined therein. Thus, what is eligible for deduction

under the aforesaid provision is the profit and gain derived from

manufacture or production of any article or things specified in the

provision. Sub-section (7) of section 80IC provides that the

provisions contained under sub-sections (5) and (7) to (12) of

section 80IA shall so far as may be applied to section 80IC of the

Act. Sub-section (5) of section 80IA provides that for computing

deduction under section 80IC of the Act, the business relating to

manufacture or production of any article or things in terms of

sub-section (2) of section 80IC has to be taken as the only source

of income of the assessee during the year, wherein, the deduction

is claimed. The expression “derived from” has come up for

interpretation before the Hon’ble Apex Court in case of Pandian

Chemical Ltd. Vs. CIT (2003) 262 ITR 278 (SC). The Hon’ble Court

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held that the expression “derived from” has a narrower

connotation than the expression “attributable to”. The following

observations of the Hon’ble Supreme Court would be of much

relevance:

“5. The High Court rejected the submission of the appellant by relying upon the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 , where this Court had clearly stated that the expression "derived from" had a narrower connotation than the expression 'attributable to' : ". . . 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 actual conduct of the business of generation and distribution of electricity." (p. 93) 6. The word "derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said :

"The word 'derived' is not a term of art. 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. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." (p. 328)”

present case, it has to be accepted that what will qualify for

deduction under section 80IC of the Act is the profits and gains

derived from manufacture/production of any article or things.

7 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

Thus, the profits and gains allowable as deduction under section

80IC of the Act must have a direct and proximate nexus with the

manufacture/production of articles or things.

Hon’ble Supreme Court while reiterating identical view has

observed that the income qualifying for deduction must have a

first degree relationship with the eligible business. In the facts of

the present appeal, admittedly, the interest income which the

assessee has claimed as deduction under section 80IC of the Act

was earned on fixed deposits kept in bank for the purpose of

securing the entry tax which was under dispute. However, it

cannot be said that such interest income has any direct nexus

with profits and gains derived from manufacture/production of

article or things.

any impact on the manufacturing activity of the assessee, since in

the worst case the assessee would have brought the raw

materials/goods on payment of entry tax. Thus, payment or non-

payment of entry tax would not have stalled the manufacturing

activity of the assessee. Therefore, keeping in view the meaning

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given to the expression derived from by the Hon’ble Supreme

Court in the decision referred to above it cannot be said that the

interest income earned by the assessee is part of profits and gains

“derived from” manufacture or production of article or things.

Therefore, in our humble opinion, the interest income earned by

the assessee would not qualify for deduction under section 80IC

of the Act. As regards the decision relied upon by learned counsel

for the assessee, in our humble opinion, it is not applicable to

assessee’s case. In any case of the matter, we have arrived at our

conclusion by applying the ratio laid down by the Hon’ble

Supreme Court, which is the law of the land. In view of the

aforesaid, we uphold the decision of learned Commissioner

(Appeals) on the issue.

disallowance made under section 14A read with Rule 8D.

assessment year 2013-14, the Assessing Officer noticed that in

the Audit Report furnished in Form 3CD the Auditor has reported

an amount or Rs.13,19,905/- as expenditure to be disallowed

under section 14A of the Act. Since, the assessee had not

9 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

disallowed such expenditure in the computation of income, the

Assessing Officer added it back to the income of the assessee.

While deciding assessee’s appeal on the issue, learned

Commissioner (Appeals) relying upon the decision of Hon’ble

Supreme Court in case of Maxopp Investment Ltd. Vs. CIT (2018)

91 taxmann.com 154 upheld the disallowance.

Assessing Officer in course of assessment proceeding, noticed

that though the assessee had earned substantial exempt income

during the year, however, it has not disallowed any expenditure

under section 14A read with Rule 8D. When called upon by the

Assessing Officer to explain the reason for not doing so, the

assessee submitted that it has not incurred any expenditure for

earning exempt income. The Assessing Officer, however, did not

find merit in the submissions of the assessee and proceeded to

compute the disallowance under Rule 8D. In the process, he

disallowed an amount of Rs. 24,38,065/-. Though, the assessee

contested the aforesaid disallowance before learned Commissioner

(Appeals), however, the disallowance was sustained.

10 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

disallowance of interest expenditure under Rule 8D2(ii) cannot be

made as the assessee had sufficient interest free fund available to

take care of the investment. Further, he submitted, while

disallowing the expenses under section 14A read with Rule 8D,

the Assessing Officer has failed to record any satisfaction. Thus,

he submitted, the disallowance made should be deleted.

observations of the Assessing Officer and learned Commissioner

(Appeals).

materials on record. Insofar as assessment year 2013-14 is

concerned, as could be seen from the facts on record, in the Audit

Report furnished by the assessee, the Auditor has reported an

amount of Rs. 13,19,905/- as expenditure disallowable under

section 14A of the Act. Whereas, in the return of income filed for

the impugned assessment year, the assessee did not disallow

such amount. Therefore, when in the Audit Report furnished by

the assessee certain amount has been found to be disallowable,

there was no necessity for the Assessing Officer to record any

11 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

satisfaction as such information is obtained from a document

furnished by the assessee itself. Thus, we do not find any merit in

the submissions of the assessee regarding non-recording of

satisfaction by the AO. However, before us, the assessee has

submitted that it had sufficient interest refund available to take

care of the investment made. In this regard, we must observe,

neither before the departmental authorities nor before us the

assessee has furnished any working computing the disallowance

under section 14A read with Rule 8D. Therefore, in absence of

any such computation/working by the assessee, we are unable to

record any conclusive finding regarding assessee’s claim.

assessment year also, the assessee, on its own, has not

disallowed any expenditure under section 14A, though; it had

earned substantial exempt income of more than Rs. 2 crores. In

the assessment order, the Assessing Officer has recorded

satisfaction while disallowing expenditure under section 14A read

with Rule 8D. Therefore, in our view, submission of learned

counsel for the assessee that the Assessing Officer has not

recorded any valid satisfaction is unsustainable. Moreover,

12 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

recording of satisfaction by the Assessing Officer regarding

correctness of assessee’s claim would arise when the assessee

itself has computed disallowance under section 14A read with

Rule 8D on its own in the return of income furnished to the

department. When the assessee has not made any such claim in

the return of income, the Assessing Officer cannot record

satisfaction in vacuum. Having held so, it is necessary to observe,

before us, learned counsel for the assessee has submitted that

the assessee had sufficient interest free refund with it to take care

of the investment. Since, the aforesaid claim of the assessee has

not been examined factually by the departmental authorities with

reference to availability of funds in the books of account; we deem

it appropriate to restore this issue to the Assessing Officer for

factual verification of assessee’s claim.

Rule 8D(2)(iii), the Assessing Officer has to compute the

disallowance by considering only those investments, which have

yielded exempt during the year. With the aforesaid observations,

the issue is restored back to the Assessing Officer for fresh

adjudication.

13 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

2013-14 relates to deduction claimed under section 80G of the

Act.

record. As could be seen, the assessee had claimed deduction of

Rs.12,500/- under section 80G of the Act on account of payment

made to Lion’s Club.

furnish supporting evidence to prove the payment made. Thus, in

absence of such evidence, the Assessing Officer disallowed the

amount of Rs.12,500/-. Learned Commissioner (Appeals) also

sustained the disallowance on the very reasoning.

on the issue, we find, assessee’s claim of deduction was

disallowed due to non-furnishing of supporting evidence. Learned

Commissioner (Appeals) has observed that the assessee not only

failed to furnish the receipt issued by the donee but also could

not furnish the eligibility certificate of the donee. In our view, for

claiming deduction under section 80G of the Act, the assessee is

required to furnish the supporting evidence, if called upon to do

14 ITA Nos.7669 & 7670/Del/2018 AYs: 2013-14 & 2014-15

so by the Assessing Officer. In absence of such supporting

evidence, assessee’s claim of deduction could not have been

allowed.

evidences to prove the claim of deduction under section 80G of

the Act, we restore this issue to the Assessing Officer for fresh

adjudication after due opportunity of being heard to the assessee.

statistical purposes, as indicated above.

Order pronounced in the open court on 31st May, 2022

Sd/- Sd/- (DR. B.R.R. KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 31st May, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi