Conventional Fastners Through Partner Ajay Kumar Gupta vs. Commissioner Of Income Tax

ITA/24/2015HC UttarakhandUKHC01011053201515 November 2017Author: HON'BLE THE CHIEF JUSTICE16 pages
AI SummaryDismissed

What were the facts?

The assessee, Conventional Fastners, engaged in manufacturing electric meters, claimed deduction under Section 80-IC of the Income Tax Act, 1961, for assessment year 2009-10. The Assessing Officer allowed the entire net profit of Rs. 54,31,995/- as deduction. The Commissioner of Income Tax, Dehradun, initiated proceedings under Section 263, noting that Rs. 22,29,129/- was earned as bank interest on fixed deposits maintained as security for a bank guarantee. The Commissioner held this interest income was not 'derived from' the manufacturing business, unlike the assessee's contention that it was incidental to securing performance guarantees. The Tribunal dismissed the assessee's appeal. A subsequent fresh assessment order, following the Commissioner's direction, taxed the interest as business income but disallowed the Section 80-IC deduction. The assessee's appeal against this was also dismissed by the Tribunal.

What did the High Court hold?

The High Court held that the interest income earned by the assessee from fixed deposits maintained as security for bank guarantees is not income 'derived from' the manufacturing business for the purpose of deduction under Section 80-IC of the Income Tax Act, 1961. The Court found no basis to distinguish Section 80-IC from Section 80HH, stating that both sections use the word 'derived' and contemplate deduction of income directly flowing from the eligible business activity. The Court reasoned that while the interest might be considered 'business income' under Section 28 of the Act, it does not meet the stricter requirement of being 'derived from' the specific business activity for the purpose of Section 80-IC. The definition of 'business' in Section 2(13) is subject to context, and Section 80-IC specifically requires profits and gains derived from the businesses enumerated in sub-section (2). The Court rejected the assessee's argument that the interest was incidental to the business, emphasizing the distinction between income 'attributable to' and 'derived from' the business. The question of law was answered against the assessee. Both appeals were rejected.

What were the issues?

1. Whether the Learned Income Tax Appellate Tribunal (ITAT) was correct in law in rejecting the appeal, ignoring that income earned from fixed deposits kept as security and as a business prerequisite is deductible under Section 80-IC of the Income Tax Act, 1961? (Mixed question of law and fact, turning on Section 80-IC). Assessee's Contentions: - The interest income earned from fixed deposits, maintained as security for performance guarantees essential to the appellant's business, is part of the business and thus deductible under Section 80-IC. - The judgments in Cambay Electrical Supply Co. Ltd. vs. CIT and Pandian Chemicals Ltd. vs. CIT, relied upon by the Revenue, are inapplicable as they were rendered under Section 80HH and there is a distinguishing feature in Section 80-IC. - The definition of 'business' in Section 2(13) of the Act, which includes trade, commerce, or manufacture, supports their claim. - Support is drawn from CIT vs. Karnal Co-operative Sugar Mills Ltd., CIT vs. Jaypee DSC Ventures Ltd., CIT vs. ELTEK SGS (P) Ltd., and CIT vs. Jagdish Prasad M. Joshi. - The fresh assessment order, stating the interest income is incidental to business, validates their contention. Revenue's Contentions: - The interest income was earned through the supervention of a third party (the Bank) and has no connection with the appellant's core business activities of manufacturing. - The matter is covered by the judgments in Cambay Electrical Supply Co. Ltd. vs. CIT and Pandian Chemicals Ltd. vs. CIT.

Which sections of the Income-tax Act were involved?

Section 80-IC,Section 263,Section 2(13),Section 28,Section 28(i),Section 2(29BA),Section 80HH

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL INCOME TAX APPEAL NO. 24 OF 2015

Conventional Fastners

……….Appellant

Versus

Commissioner of Income Tax, Dehradun …………..Respondent & INCOME TAX APPEAL NO. 21 OF 2017

Conventional Fastners

……….Appellant

Versus

Commissioner of Income Tax, Dehradun …………..Respondent

Mr. (Dr.) Kartikey Hari Gupta, Advocate for the appellant. Mr. H.M. Bhatia, Advocate for the respondent.

Dated: 15.11.2017

Coram: Hon’ble K.M. Joseph, C.J. Hon’ble V.K. Bist, J.

K.M. Joseph, C.J. (Oral)

There is delay of 68 days in filing ITA No. 21 of 2017. In the circumstances, after hearing the learned counsel for the parties, the Application (CLMA No. 11172 of 2017) for condonation of delay will stand allowed and the delay will stand condoned.

2.

Appeals being connected, we are disposing of the same by a common judgment. These Appeals are maintained under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act).

3.

ITA No. 24 of 2015 is directed against the judgment of the Tribunal, and the order came to be passed in respect of assessment year 2009-10. T

The order continues below.

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