ITO, WARD - 3(3), , KOLKATA vs. M/S. PDP STEELS LTD., , KOLKATA

Brief facts of the case are that the assessee company carries on the business of manufacturing and trading of iron and steel products and it had filed return of income for AY 2014-15 declaring total income of Rs.5,654/- under normal provisions of the Act representing non-operating miscellaneous income after claiming 100% deduction of the business profit of Rs.4,17,64,799/- u/s. 80IC(2)(a)(i) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) and showed book profit of Rs.3,82,04,075/-. The assessee company has an industrial area in Bonda, Narang, District-Kamrup, Gauhati in the state of Assam. In the said industrial area, the assessee manufactures/produces iron and steel articles/items and is admittedly entitled to get deduction u/s. 80IC(2)(a)(i) of the Act as per CBDT Notification on the subject. According to the assessee, it has been claiming the deduction since initial assessment year 2011-12 and this is the fourth year of claiming PDP Steels Ltd. AY 2014-15 of deduction. After the case was selected for scrutiny for this assessment year, and the AO disallowed the assessee’s claim of deduction for the following income u/s. 80IC(2)(a)(i) of the Act: i) Interest income on fixed deposit in bank Rs.20,37,345/-; ii) Interest earned on security deposit Rs.4,13,633/- and iii) Interest earned from customers/other parties Rs.2,55,50,680/-.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who in respect of the AO’s action disallowing interest income of Rs.20,37,345/- has held as under: “In view of the above discussion and respectively following the decision of the jurisdictional High court in the case of Reckitt Benckiser (India) Vs. Addl. Commissioner of Income Tax (supra), I am of the view that there is no infirmity in the finding of the AO in holding that the appellant was not entitled for deduction u/s. 80IC of the I. T. Act, 1961 in respect of the interest income of R.5,52,844/- from bank deposits under the head “Other Income”. Therefore, the interest income of Rs.5,52,844/- is held to be not eligible for deduction under the section 80IC of the Act. Accordingly, this ground is partly allowed.”

Aggrieved the Revenue is before us assailing the aforesaid action of Ld. CIT(A). However, we note that the Ld. CIT(A) at page 15 of the impugned order has confirmed the action of the AO in respect of disallowance of interest income from fixed deposit. However, has mistakenly typed the figure as Rs.5,52,844/- in place of Rs.20,37,345/-. Since the interest income from fixed deposit cannot be having first degree nexus with the profit and gain derived from the undertaking which is eligible for deduction u/s. 80IC of the Act, we confirm the order of the Ld. CIT(A) and correct the mistake of the figures shown as Rs.20,37,345/- in place of Rs.5,52,844/-. And so the Revenue appeal to this extend succeeds.

Coming next to the disallowance of the interest earned on security deposit from the claim of deduction u/s. 80IC of the Act, according to Ld. AR, the security deposits were kept mainly with Electricity Department as security for getting electric supply required for the purpose of manufacturing of C.R. Coil. According to Ld. AR, the electricity charges levied by the electricity department was a major cost in the manufacturing process and the deposits made for this purpose are directly linked with manufacturing business of the assessee and as such the deposits are integral part of the assessee’s business, and, therefore, the income earned on those deposits were indisputably business income and was rightly claimed for deduction u/s. 80IC of the Act. Per contra, the Ld. DR submitted that the PDP Steels Ltd. AY 2014-15 interest earned from the security deposit is not derived by the undertaking or enterprise from any business referred to in sub-section (2) of section 80IC of the Act and, therefore, the interest earned on the security deposit for supply of electricity cannot be treated as income derived from the industrial undertaking within the meaning of section 80IC of the Act and for coming to such a conclusion, we rely on the decision of Hon’ble Supreme Court in the case of Pandian Chemicals Vs. CIT 362 ITR 278 (SC) and Bacha F Guzdar Vs. CIT (1955) 27 ITR 1. However, we note that this issue has not been decided by the Ld. CIT(A) .

Coming the interest income earned for delayed payment from customers, we note that assessee manufactures C. R. Coil and sell the same to the customers on credit. And if there is any delay in receipt of payment from the customers and since it affects the assessee’s working capital, the assessee is compelled to borrow external funds for which it incurs interest expenditure. In order to compensate the loss of any interest payment, assessee charges interest from the customers/sundry debtors for the delay in making payment to it. It was pointed out by the Ld. AR that as per the mandatory accounting standard and the Companies Act, the same are reported as income and expenses separately. According to Ld. AR, such interest income and interest payment are directly related to the assessee’s business operation. The Ld. AR relied on the decision of the Hon’ble Gauhati High Court in the case of CIT, Guwahati-II Vs. Universal Pipes (P) Ltd. (2012) 211 Taxman 420 (Gau) wherein a similar case the Hon’ble High Court upheld the view of the Tribunal which held that the amount by way of interest from trade debtor has to be treated as business income and it has been held as derived from its undertaking thus making it eligible for deduction u/s. 80IC of the Act. It was brought to our notice that the Hon’ble Guwahati High Court while deciding the case relied on the judgment of the Hon’ble Apex Court in CIT Vs. Govinda Choudhury (1993) 203 ITR 881 wherein the Hon’ble Apex Court held that the interest awarded to the assessee therein in an arbitration proceeding for delayed payment in a contract executed by the assessee was to be recorded as business income and could not be treated as ‘income from other sources’ and upheld the action of the Tribunal. So, according to Ld. AR in the present case, the assessee had sold the C. R. coil manufactured from its eligible undertaking to customers on credit and when there is a delay in making payment by the customers to assessee, then the assessee charged interest upon the customers which have been shown by the assessee as interest income from the PDP Steels Ltd. AY 2014-15 customers. Therefore, according to Ld. AR since the interest income for delayed payment from the customers for the product manufactured by the assessee are to be treated as Business Income in the light of the Hon’ble Supreme Court decision in Govinda Choudhury (supra), the income thus derived by the assessee from the undertaking it is eligible for deduction u/s. 80IC(2) of the Act as held by the Hon’ble Guwahati High Court in Universal Pipes (P) Ltd. (supra) and, therefore, the AO’s action of not allowing deduction is per se erroneous. However, we are not inclined to decide these grounds since it is noted that the Ld. CIT(A) has not adjudicated the issues relating to two issues i.e. deduction in respect of income from delayed payment from customers and interest on security deposit (electricity), therefore, both these issues are set aside back to the file of the Ld. CIT(A) for fresh adjudication with a direction to decide the issues in accordance to law after hearing the assessee and without being influenced by any observation made by us supra.

In the result, the appeal of revenue is allowed for statistical purposes as indicated above. Order is pronounced in the open court on 18th March, 2020