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Interpretations of terms "derived from" and ‘attributable to’ – Deduction u/s 80IA and 80IB on interest income

Mar 04, 2020

The expression used in Sec. 80-IA is “Profits and gains derived from any business of an Industrial Undertaking etc” and the expression “derived from”’ is narrower then ''attributable to'' the business. The source of the income must be directly connected with the business and generated therefrom. Interest income is not considered to be directly “derived from” eligible industrial undertaking and is also not to be considered for deduction. 

SC in the case of Cambay Electric examined the expressions “attributable to” and “derived from”, and elucidated that the legislature intended to cover receipts from sources other than the actual conduct of the business and concluded that the expression “derived from” covers the receipts by way of all the profits and gains of the industrial undertaking. Further Bombay HC in the case of HINDUSTAN LEVER examined the word "derived" and noted that as far as income-tax law is concerned, it has been given a narrow meaning—a strict meaning by Courts and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly. In other words, one has to only consider the proximate source and not the source to which it may ultimately be referable. 

In this context, the expression, “Profits and gains derived from an Industrial Undertaking”, has generated a lot of controversies and the issue has been in debate before the Courts & Tribunal. At Taxsutra Database Insight - Issue No. 195, we mainly focus on eligibility of deduction u/s 80-IA, 80-IB of the Act on interest earned on fixed deposits, etc. 

Interpretations of the words "derived from" and ‘attributable to’ – Deduction u/s 80IA and 80IB on Interest income  

1) [TS-6160-HC-2008(Bombay)-O] - Interest on fixed deposits from bank and other interest income - HC: Interest on fixed deposits from banks and other interest income derived from the business of the industrial undertaking are eligible for deduction u/s 80-IA; HC directs AO to include the interest income also as part of the assessee's business income for granting relief u/s 80-IA; Applies decisions in Eltek SGS (P) Ltd. [TS-83-HC-2008(DEL)-O] , Distinguishes Pandian Chemicals [TS-5021-SC-2003-O] 

Editorial Note 1:  Revenue appeal against HC is dismissed by SC in SLP(C) No. 025175 / 2009 dated 05/09/2018 by Hon`ble Justice A.K. SIKRI, Hon`ble Justice ASHOK BHUSHAN (Information sourced from the SC website, order copy is, however, not available)

Editorial Note 2: HC decision of Eltek [TS-83-HC-2008(DEL)-O] is reversed by SC in [TS-5044-SC-2010-O] 

2) [TS-5653-HC-2018(Bombay)-O] – Difference in the language of the two Sections – The term "profits and gains derived from the undertaking" and "profits and gains derived from the business of the undertaking" - HC: Deduction u/s 80-IA available on the interest on fixed deposits (FDs) and compensation received for non-supply of spare parts; Places reliance on decision of Eltek reported in [TS-83-HC-2008(DEL)-O] wherein the difference in the language employed in Sections 80-IB and 80HH of the Act was brought out; HC notes that, in view of the difference in the language of the two Sections, co-ordinate bench in [TS-6160-HC-2008(Bombay)-O] held that interest on FDs in the bank would be profits and gains derived from any business of an industrial undertaking and the same reasoning would apply to extend deductions under Section 80-IA of the Act for the compensation received for non-supply of spare parts. 

Editorial Note: HC decision of Eltek [TS-83-HC-2008(DEL)-O] is reversed by SC in [TS-5044-SC-2010-O] 

3) [TS-5348-SC-2018-O] - SC: FD-interest assessable as business income ineligible for Sec 80IC deduction - SC dismisses assessee’s SLP against HC order denying Sec.80-IC deduction on interest earned on fixed deposit with bank for AY 2009-10 as it is not 'derived from' eligible business; HC had observed that the Legislature has chosen to employ the word ‘derived’ in sec.80-IC as distinguished from ‘attributable to’; HC remarked that “Had the Legislature used the words “attributable to”, then it would have a much wider effect and it may have encompassed within itself, the income, which is the subject matter of controversy before us”; HC further affirmed AO’s order holding that interest income qualifies as business income u/s. 28 but no deduction can be allowed u/s 80-IC. 

4) [TS-6991-HC-2018(Madras)-O]: HC: Grants Sec. 80-IA deduction on interest on deposits used for obtaining LC - HC reverses ITAT order for AY 1996-97, grants Sec. 80IA deduction to assessee-company with respect to  interest earned on deposits (FD) kept with the bank by way of margin money for taking ‘foreign Letter of Credit’ (‘LC’); Notes that the requirement to furnish the FD was a pre-condition to enable the assessee to open a foreign LC for the purpose of import of critical components for the manufacture of windmill, which incidentally earned some interest; Observes that it was not assessee's surplus money, which was deposited by way of fixed deposit and had earned interest; Holds  that ITAT committed an error by merely placing reliance on SC ruling in Pandian Chemical which was rendered in context of Sec. 80HH, cites Kerala HC ruling in K. Ravindranathan Nair to highlight that Sec. 80I, 80IA, and 80IB are profit linked deductions whereas Sec. 80H, 80HH, etc. have different scheme altogether (linked to investment in plant and machinery); 

5) [TS-5205-HC-2017(Madras)-O] – HC: The expression "derived" is used, as against "attributable to", the width and the amplitude is narrower – HC rules in favour of Revenue, rejects assessee’s submission that the amount represents interest earned from interest-free security deposit made over by lessees, which was invested in FDs was income derived from business of developing an SEZ falls within the ambit of Section 80-IAB of the Act; HC separately on assessee submission that SC judgment of Cambay Electric Supply, Menon Impex and Pandian Chemicals does not deal with the provision at hand, notes that ‘the provisions are pari materia and that the ratio of the judgements cited above is, as to what is the meaning to be given to the term "derived"’; Relies on [TS-5021-SC-2003-O], [TS-5158-HC-2007(Madras)-O], distinguishes [TS-6160-HC-2008(Bombay)-O] 

6) [TS-5726-HC-2016(Delhi)-O] : HC upholds tax holiday claim u/s 80-IA(2A) on other-income, 'first degree' nexus inapplicable - HC dismisses IT Department’s appeal, upholds tax holiday claim u/s 80IA(2A) on Rs. 4500 cr ‘other-income’; AO had denied Sec 80IA deduction by excluding certain receipts (such as extra ordinary income of license fee reimbursement, provisions written back, etc) on the grounds that these receipts were not 'derived from' the eligible business i.e telecom business; Upholds ITAT order that condition of 'derived from' (present in sub-sections 1 and 2 of Sec 80IA relating to deduction for undertakings engaged in infrastructure development, etc.) is not applicable for deduction to telecom business covered by sub-section 2A, hence requirement of first degree nexus not applicable; Rejecting Revenue’s stand that ITAT erred in reading the sub-section (2A) in isolation, HC clarifies that “Section 80-IA (2A) treats an undertaking providing telecommunication services as a separate species warranting a separate treatment as is evident from the non-obstante clause with which it begins.”; Further clarifies that even if the undertaking has other eligible business qualifying for deduction u/s 80IA(1), it shall not disentitle its claim u/s 80IA(2A); 

7) [TS-6610-ITAT-2015(Chennai)-O] : Deduction u/s 80IA - Interest income earned from deposit –  ITAT: Sec. 80-IA allows deduction on profits and gains derived from any business of an industrial undertaking – ITAT dismiss Assessees` appeal, holds interest earned on deposits and retention account under the financing agreement with the lenders, cannot be considered as profits and gains of business derived from the industrial undertaking; ITAT relies on Pandian Chemicals, Hindustan Lever & Sterling Foods, notes that the word “derive” usually followed by the word “from” and it means; “get, to trace from a source, arise from, originate in, show the origin of formation of”; States that “There must be, for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking.” 

8) [TS-5080-HC-2015(Telangana & Andhra pradesh)-O] – HC : Denies Sec 80IA benefit on import license sale, absent nexus with assessee's business - HC denies Sec 80IA benefit on sale of import license by assessee (for AYs 1993-94, 1994-95, 1995-96, 1996-97) as it had no direct nexus with assessee’s business of manufacturing and selling rubber moulded goods; Rejects assessee’s contention that all incomes arising during course of running the business would be eligible for deduction u/s 80-IA; Interprets Sec 80IA and holds that the words “derived from” would mean to have direct nexus between profits & gains and business of an industrial undertaking; Further rejects assessee’s stand that the sale of licence had direct nexus with its business, observes “merely because the licence was obtained for procuring the raw material for manufacturing finished goods does not mean that the sale of advance licence has nexus with the business of manufacturing and sale of finished product”; Thus, observing that profits derived from sale of license were incidental and not direct, holds that such profits, at the most, could be treated as income from sources other than the actual conduct of the business; 

9) [TS-5758-ITAT-2011(Bangalore)-O] - ITAT: Sec 80IB deduction available on interest from the deposit with the Bank for opening LC - ITAT holds that deduction under section 80IB was available on interest earned on deposits made for opening LC with the Bank; Holds further that income has direct nexus with the business activity of industrial undertaking relying on the decision of Delhi High Court in the case of CIT v Eltek SGS (P) Ltd (300 ITR 6). Separately, allowa a claim for deduction of the provision for estimation of warranty liability which was made based on the past experience / data and industry trend; Follows [TS-111-SC-2009-O] 

10) [TS-5309-ITAT-2010(Ahmedabad)-O] - ITAT: Interest on Fixed deposits (FDs) with banks for obtaining letter of credit (LC) has only a distant relationship and no direct relationship – ITAT rules in favour of Revenue, disallows assessee’s claim u/s 80-IA on interest earned on fixed deposits made for opening letters of credit (LC); ITAT notes that assessee is in the business of manufacturing medicines and not of earning interest, then interest earned on FDs made for opening LOC or for obtaining other facilities cannot be said to be derived from "business of manufacturing of medicines"; States that “The connection is remote and not proximate which is the requirement resulting from the words "derived" used in this section”; ITAT separately allows deduction u/s 80-IA on interest income received from customers and late payment of the sale proceeds; Follows [TS-5173-HC-2006(GUJARAT)-O] 

11) [TS-6066-HC-2009(DELHI)-O]- HC: Advance received from the customers and forfeited would not be eligible for deduction under s. 80-IA – HC sets aside ITAT order, rules in favour of Revenue; Holds amount to be treated as trading receipt and therefore, it has to be added as income of the assessee; States that “The transferring of this amount to the capital reserve account unilaterally by the assessee through book entry was not an appropriate step”; Upholds Ld. CIT(A) order that income was not derived from any goods or services produced, assessee would not be eligible for deduction u/s 80-IA; Follows [TS-3-SC-1996-O][TS-63-SC-2009-O]; HC separately holds, interest charged from customers on late payments has the same character as ‘sales’; Remands back to the AO to consider this aspect afresh. 

12) [TS-5173-HC-2006(Gujarat)-O] – Interest on late payment made by the customers has the same character as "sales” - HC: Interest receipts towards late payment of sales consideration is part and parcel of the profits derived from the industrial undertaking for the purpose of relief u/s 80-I of the Act; Sets aside ITAT order, holds that while computing deduction u/s  80-I, interest received from trade debtors towards late payment of sales consideration is not required to be excluded from the profits of the industrial undertaking as the same derived from the business of the industrial undertaking. Relies on [TS-2-SC-1992-O] 

13) [TS-63-SC-2009-O] - SC: The connotation of the words ‘derived from’ is narrower as compared to that of the words ‘attributable to’ – SC notes, by using the expression ‘derived from’, Parliament intended to cover sources, not beyond the first degree; SC holds, DEPB / Duty Drawback not profits derived from 'eligible business'; Hence, cannot form part of net profit for computing deduction u/s 80-IB; SC emphasizes that Section 80I, 80IA and 80IB should be read as having a common Scheme; Explains that the profits of an eligible business are to be computed as if such eligible business is the only source of income of the assessee; Sec 80IA(1) is an overriding provision that is required to be read into Sec 80IB, the scheme of 80I, 80IA, and 80IB provides for incentives linked to profits; Subsection (1) purports to reduce the quantum of deduction to a specified percentage of profits "derived from industrial undertaking" as against "profits attributable to industrial undertaking"; Further DEPB/Duty Drawback are incentives that flow from the Schemes framed by the Central Government or from Sec 75 of the Customs Act; States that hence, the incentive profit is not profits derived from eligible business u/s 80-IB, they belong to the category of ancillary profits of such undertaking and do not fall within the expression "profits derived from industrial undertaking" in Sec 80IB Further in terms of AS-2, such benefits cannot be credited against the cost of manufacture of goods debited in the P&L Account; For Sec 80IA, 80IB as such credits would constitute an independent source of income beyond the first degree nexus between the profits and the industrial undertaking;  SC accordingly holds Duty Drawback receipts/ DEPB benefits were held to be not forming part of the net profits of eligible industrial undertaking for the purpose of Section 80I/80IA/80IB of the Act.  

14) [TS-5066-SC-1997-O] – Profits and gains "attributable to" priority industry - SC: Interest earned on securities is income attributable to priority industry eligible for relief u/s 80-I; SC notes that assessee requirement to create the Contingencies Reserve is a part of the obligation as a licensee to carry on its business of generating electricity and the sums appropriated to the Contingencies Reserve are invested in securities authorised under the Indian Trusts Act, 1882 being a condition statutorily incorporated in the license granted under the Electricity Supply Act, is incidental to the carrying on of the business of generation and distribution of electricity; SC holds, it is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity, the income earned by way of interest on the sums appropriated to the Contingencies Reserve which have been invested in securities can be said to be profits and gains attributable to the business of the assessee for the purpose of s. 80-I; Applies [TS-5004-SC-1978-O]  

On Principles

1) [TS-6204-HC-2017(Karnataka)-O] - HC Full Bench: Settles Sec 10A/10B tax-holiday eligibility on interest income in taxpayer’s favour - Full Bench of the HC rules in favour of  taxpayer, holds that income by way of interest on bank deposits or staff loans earned by 100% export oriented unit is eligible for tax holiday u/s 10A or 10B for AY 2001-02; Rejecting Revenue's argument, HC Full Bench holds that such interest income would not be taxable as ‘Income from other Sources’ u/s 56; Applying the purposive interpretation to tax holiday provisions, HC's Full Bench observes that "The incidental activity of parking of surplus funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is an integral part of their export business activity  and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking"; 

2) [TS-5011-SC-2016-O] - SC : Allows Sec 80-IB /80-IC deduction on subsidies applying ‘direct-nexus’ test; Distinguishes Pandian, Liberty rulings - SC rules in favour of taxpayer rules that various subsidies (transport, power, interest, and insurance) received to qualify for incentive deduction u/s 80IB and 80IC for AY 2004-05; SC applies ‘direct nexus’ test laid down by co-ordinate bench in Sterling Foods, holds that all the four subsidies were revenue receipts and had direct nexus with profits and gains of the industrial undertaking; Rejects Revenue’s stand that the element of directness was missing as immediate source of subsidies cannot be said to be from business since it was tendered by Government; Clarifies that “So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products.” ; Further points out that Sec 80IB/IC have reference to net profit and net profit can only be calculated by deducting all elements of cost from sale price; Distinguishes Revenue’s reliance on co-ordinate bench ruling [TS-5004-SC-1978-O] which was concerned with the distinction between “profit derived from” and “profit attributable to”;  

3) [TS-5004-SC-1978-O] - The distinction between the words ‘attributable to’ and ‘derived from’ – SC holds, the expression “attributable to” is having a wider import than the expression ‘derived from’; States that the expression ‘attributable to’ intends to cover receipts from a source other than the actual conduct of the business of the specified industry and on the contrary, the expression ‘derived from’ cannot have a wider import to include any income which can be attributable to the business. 

4) [TS-5021-SC-2003-O] - Interest on deposits with Electricity Board, not eligible for deduction u/s 80HH - SC: Interest earned by industrial undertaking on deposits with Electricity Board does not qualify for relief u/s 80HH – SC holds, the words 'derived from” in s. 80HH must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking; Notes that, electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking; Explains that the derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself; Applies [TS-5016-SC-1954-O], [TS-5004-SC-1978-O]

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