RASBIHARI TABOCCO PROCESSORS LTD. vs. DY. C.I.T. (ASSTT.)

Facts

The assessee, Rasbihari Tabocco Processors Ltd., engaged in tobacco processing, filed an appeal against an order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, dated July 20, 2001, for Assessment Year 1991-92. The dispute concerns the eligibility of interest income for deductions under Sections 80HH and 80I of the Income Tax Act, 1961. The assessee claimed deductions on interest income of Rs. 1,90,034 from IDBI (required under Section 32AB) and Rs. 1,09,490 from bank deposits made for bank guarantees for Tendu leaf purchases. The CIT(Appeals) had partly allowed the claim, holding the IDBI interest income eligible. The ITAT, however, reversed this, holding both interest incomes not derived from the industrial undertaking and thus ineligible for deduction. The ITAT also rejected the assessee's alternative plea to set off interest expenditure against interest income.

Held

The High Court answered the first question in the negative, in favour of the Revenue, and the second question in the affirmative, in favour of the Assessee. For the first issue, the Court relied on the Supreme Court decision in Liberty India vs. Commissioner of Income Tax (2009) 317 ITR 218 (SC), holding that interest income from bank deposits, irrespective of the purpose, is derived from the bank and not directly from the industrial undertaking, thus not eligible for deduction under Sections 80HH and 80I. Regarding the second issue, the Court referred to its own unreported decision in Commissioner of Income Tax, Ahmedabad vs. Nirma Ltd. (Tax Appeal No. 811 of 2013 dated 27.01.2014), implying that interest expenditure should be considered. The operative direction was to partly allow the Tax Appeal, reflecting the mixed outcome on the two questions.

Key Issues

1. Whether, in the facts and circumstances, the ITAT was correct in law in holding that interest income of Rs. 1,90,034 on IDBI deposit (as required under Section 32AB) and Rs. 1,09,490 on bank deposits for bank guarantees cannot be considered income derived from the industrial undertaking and should be excluded for calculating deductions under Sections 80HH and 80I of the Income Tax Act, 1961. Assessee's contention: The interest income should be considered derived from the industrial undertaking and eligible for deduction. The ITAT erred in excluding it. Revenue's contention: The ITAT's finding that the interest income is not derived from the industrial undertaking is correct and should be upheld. The Supreme Court decision in Liberty India was relied upon. 2. Whether, in the facts and circumstances, the ITAT was correct in law in holding that for calculating deductions under Sections 80HH and 80I, gross interest income, without reducing therefrom the interest expenditure, is required to be excluded. Assessee's contention: Interest expenditure should be set off against interest income before exclusion for deduction calculation. Revenue's contention: Not recorded in the judgment.