Bombay High Court
Gateway Terminals India Pvt Ltd vs Dy.Commissioner Of Income Tax on 26 August, 2025
Author: B. P. Colabawalla
Bench: B. P. Colabawalla
2025:BHC-OS:14175-DB
sr.1 & 2-itxa-1139-2021.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
TRUSHA
TUSHAR
MOHITE ORDINARY ORIGINAL CIVIL JURISDICTION
Digitally signed by
TRUSHA TUSHAR
MOHITE
Date: 2025.08.26
INCOME TAX APPEAL NO. 1139 OF 2021
14:31:49 +0530
Gateway Terminals India Pvt. Ltd. .. Appellant
Versus
Deputy Commissioner of Income-tax,
Raigad .. Respondent
WITH
CIVIL APPELLATE JURISDICTION
WRIT PETITION NO. 4963 OF 2021
Gateway Terminals India Pvt. Ltd. .. Petitioner
Versus
Income Tax Appellate Tribunal,
Mumbai & Ors. .. Respondents
P. F. Kaka, Senior Adv. a/w Adv. Manish Kanth i/b. Adv. Atul K.
Jasani for the Appellant/Petitioner.
Adv. Akhileshwar Sharma for the Respondents.
CORAM: B. P. COLABAWALLA &
FIRDOSH P. POONIWALLA, JJ.
RESERVED ON : JULY 1 , 2025
PRONOUNCED ON : AUGUST 26, 2025
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JUDGEMENT (per Firdosh P. Pooniwalla, J.)
1. The Appellant/ Petitioner is a Joint Venture Company of
APM Terminals Mauritius Limited and Container Corporation of India
Limited (a Government undertaking).The Appellant/Petitioner will
hereinafter in this order be referred to as the Appellant.
2. The Appellant has filed the present Appeal challenging the
Order dated 28th May, 2020 passed by the Income Tax Appellate
Tribunal ( hereafter referred to as the ” the ITAT”) Bench – “G” Mumbai
in ITA No. 300/Mum/2018 for the Assessment Year (A. Y.) 2012-13,
wherein the ITAT has inter alia rejected the claim of the Appellant for
deduction of interest under Section 80IA of the Income Tax Act, 1961
(herein after referred to as ” the IT Act“).
3. The Appellant filed a Miscellaneous Application against the
said Order dated 28th May, 2020, submitting that the Order contained
grave errors of both facts and law. By an Order dated 27 th April, 2021,
the ITAT dismissed the said Miscellaneous Application. The Appellant
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has filed the present Writ Petition challenging the said Orders dated
28th May, 2020 and 27th April, 2021.
4. We will first consider the Appeal filed by the Appellant.
INCOME TAX APPEAL NO. 1139 OF 2021
5. The Appellant, during the previous year relevant to A.Y.
2012-13, was engaged in its only business of operating and maintaining
a container terminal at Jawaharlal Nehru Port Trust (JNPT), which was
eligible for deduction under the provisions of Section 80IA of the IT
Act.
6. During the previous year relevant to A.Y. 2012-13, interest
income arose out of the said eligible business of the Appellant. It is the
case of the Appellant that interest was earned out of money accrued
from the eligible business of the Appellant and the same was also
utilized for the purpose of its eligible business. The interest was earned
from fixed deposits maintained with banks for the purpose of the
business and related to the business of the Appellant. Interest was also
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earned on refund of taxes due to wrongful deduction of TDS by the
customers of the Appellant.
7. The twin business reasons for parking the funds in fixed
deposits with the bank were :-
a) under the License Agreement dated 10 th August, 2004
(hereinafter referred to as “the said License Agreement”) with
JNPT, the Appellant was under an obligation to replace cranes
after a certain period. These cranes are a significant portion of
the machinery and equipment of the Appellant. The failure to
replace the cranes as per the said License Agreement would result
in a revocation of the license by JNPT. Therefore, a portion of the
funds were periodically deposited/kept aside by way of fixed
deposits to meet the contractual obligations required to be
fulfilled in order to continue the Appellant’s business of operating
and maintaining the container terminal.
b) The interest also arose due to parking of funds in
compliance of this Court’s Order dated 2 nd July, 2012, arising out
of a tariff dispute between the Appellant and the Tariff Authority
for Major Ports (TAMP). The Tariff collected by the Appellant
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subject to final orders of this Court.
8. The Appellant filed its Return of Income for the A.Y. 2012-
13 claiming deduction under Section 80IA of the IT Act of its business
income, which included the interest income as mentioned above.
9. During the course of the assessment proceedings, by an
Assessment Order dated 29th February, 2016, the Assessing Officer
(hereinafter referred to as “AO”) accepted the Petitioner’s claim for
deduction under the provisions of Section 80IA of the IT Act, which
also included the interest earned on fixed deposits as being a part of the
business income. The interest income arising out of income tax refund
was taxed by the AO under the head “Income from other Sources”.
10. Against the said Assessment Order dated 29th February,
2016, the Appellant preferred an Appeal before the Commissioner of
Income Tax (Appeals) [hereinafter referred to as “CIT (A)”].
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11. CIT (A), in the course of hearing of the Appeal filed by the
Appellant, issued an “Enhancement Notice”, under Section 251(2) of the
IT Act, proposing to disallow deduction under Section 80IA of the IT
Act for various amounts interalia including interest earned on fixed
deposits, which was accepted as being part of business income and
accordingly allowed as deduction by the AO. The Appellant responded
to the said Enhancement Notice vide its various submissions. The
CIT(A), by an Order dated 31 st October, 2017, rejected the Appellant’s
submissions qua eligibility of interest earned on fixed deposits under
Section 80IA of the IT Act as not being derived from an industrial
undertaking. The CIT (A) was of the view that the interest income
derived from the bank against parking of surplus funds cannot be
considered to be derived from the activity of the industrial undertaking
merely by reason of the fact that the activity may be resulting in earning
the said income in an indirect, incidental or remote manner.
12. Aggrieved by the CIT(A) Order dated 31 st October, 2017, the
Appellant preferred an Appeal before the ITAT.
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13. By an Order dated 28th May, 2020, the ITAT rejected the
contentions of the Appellant.
14. The Appellant thereafter filed a Miscellaneous Application
against the Order dated 28th May, 2020 passed by the ITAT. In the
Miscellaneous Application, the Appellant submitted that the Order
passed by the ITAT contained grave errors both in fact and in law.
15. The Appellant also filed an Appeal, being the present
Appeal, before this Court, against the said Order dated 28 th May, 2020
of the ITAT.
16. The Miscellaneous Application of the Appellant was rejected
by the ITAT by an Order dated 27th April, 2021. The Appellant filed the
present Writ Petition challenging the said Order dated 27 th April, 2021
passed in the said Miscellaneous Application.
17. Mr. Porus Kaka, the learned Senior Counsel appearing on
behalf of the Appellant, submitted that the Appellant had entered into
the said License Agreement with JNPT to develop and construct a
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container terminal at JNPT on a Build Operate Transfer (BOT) basis.
The Appellant had accordingly developed and constructed a container
terminal on a BOT basis. Under the said License Agreement, the
Appellant has a license to operate and maintain the said terminal for a
period of 30 years. As a mandatory condition for operating and
maintaining the port, Clauses 8.34 to 8.36 of the said License
Agreement required the Appellant to replace the equipment at a certain
time and to plan for such replacement of equipment well ahead of such
due date for replacement.
18. Mr. Kaka submitted that, prior to signing the said License
Agreement for JNPT, while the bidding process was underway, the
Appellant had confirmed to JNPT, by a letter dated 19 th February, 2004,
that it would replace the equipment within a stipulated time as per
Clause 3.85 of RFP, Volume -III. This undertaking was in addition to
the said Clauses 8.34, 8.35 and 8.36 of the said License Agreement.
19. Mr. Kaka submitted that, in accordance with its obligation
under the said License Agreement, the Appellant began the process of
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planning for the replacement of the equipment well ahead of the due
date by setting aside money in fixed deposits for the said purpose.
20. Mr. Kaka further submitted that, in addition, the Tariff
Authority for Major Ports (TAMP), by its order dated 19 th January,
2012, had significantly reduced the tariff charged by the Appellant. The
same was challenged by the Appellant in this Court by filing Writ
Petition (L) No. 1410 of 2012. This Court, by its Order dated 2 nd July,
2012, granted ad-interim relief to the Appellant allowing it to charge
and collect tariff at the rates prevailing prior to reduction of tariff by
TAMP. However, the Appellant was directed to keep an account of every
such transaction. Further, collection of any tariff amount over and
above the new tariff prescribed was made subject to further orders of
this Court.
21. Mr. Kaka submitted that the financials of the Appellant for
A.Y 2012-13 clearly reflect the above position. Mr. Kaka submitted that
the Appellant had an obligation to replace cranes costing approximately
Rs. 531 crores and had also received differential tariff, under the order
of this Court, aggregating to approximately Rs. 29 crores. The
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Appellant, in order to comply with its obligation for maintaining and
operating the port and accounting for differential tariff, kept money in
fixed deposits aggregating to approximately Rs. 169 Crores. Upon this
interest was earned amounting to Rs. 8,67,66,538/-, upon which
deduction under Section 80IA was claimed.
22. In addition, Mr. Kaka also referred to the financials of the
Appellant for the years ending 31 st March, 2023 and 31st March, 2024 to
show the redemption of fixed deposits by the Appellant for actual
purchase of cranes under its obligation under the said License
Agreement. The said financials showed that fixed deposits amounting to
Rs. 280 crores 51 lakhs (approx.) and Rs. 16 crores 70 lakhs (approx.)
were redeemed during these financial years and cranes worth Rs. 562
crores (approx.) were simultaneously purchased.
23. Mr. Kaka further submitted that it is undisputed that
planning for replacement and actual replacement of cranes was a part
of the mandatory obligation of the Appellant for developing, operating
and maintaining the infrastructure facility i.e. the port.
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24. Mr. Kaka submitted that this is also accepted by CBDT who
has vide its Order dated 21st April, 2006 granted an approval under
Section 10 (23G). While granting such approval CBDT had approved the
business of the Appellant as an eligible business under clause (d) of the
Explanation to sub-section (4) (i) of Section 80IA of the IT Act.
25. Mr. Kaka submitted that Section 80IA applies to two
categories of assessees, i.e, one who has profit and gain derived by an
industrial undertaking or an enterprise from a business referred to in
sub-section(4) of 80IA of (i) developing or (ii) operating and
maintaining or (iii) developing, operating and maintaining any
infrastructure facility. Mr. Kaka submitted that the term “enterprise” in
Section 80IA (1), read with the business referred to in Section 80IA (4),
is much wider in construct and meaning. It covers all income having
nexus or which is a part of the eligible business of developing, operating
and maintaining any infrastructure facility.
26. Mr. Kaka submitted that the fixed deposits resulting into
interest were maintained by the Appellant under its obligation to
replace cranes under Clauses 8.35 and 8.36, read with Appendix 15, of
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the said License Agreement. He further submitted that a portion of the
fixed deposits was also maintained due to the tariff dispute in respect of
which this Court had granted ad-interim relief to the Appellant with an
obligation to keep aside the differential amount until the dispute finally
gets settled/ adjudicated. Mr. Kaka submitted that both the aforesaid
reasons are directly and inextricably linked to the eligible business
defined under Section 80IA of the IT Act.
27. In support of his submissions, Mr. Kaka relied upon the
following judgements:-
(a) CIT v/s. Karnataka State Co-operative Apex Bank.
(2001) 251 ITR 194 (SC);
(b) CIT v/s. Bangalore District Co-operative Central
Bank Ltd. (1998) 233 ITR 282 (SC);
(c) CIT v/s. Shree Rama Multi Tech Ltd. (2018) 403
ITR 426 (SC);
(d) Arul Mariammal Textiles Ltd. v/s. Assistant CIT
(2018) 97 Taxmann.com 298 (Madhya Pradesh);
(e) CIT v/s. Lok Holdings (2009) 308 ITR 356 (Bom)
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(f) CIT v/s. Indo Swiss Jewels Ltd. (2006) 284 ITR 389
(Bom);
(g) ITO v/s. Hiranandani Builders (2017) 83
Taxmann.com 65 (ITAT- Mum);
(h) PCIT v/s. Hiranandani Builders (Income Tax Appeal
No.1413 of 2016);
(i) CIT v/s. JagdishPrasad M. Joshi (2009) 318 ITR
420 (Bom)
(j) TEMA Exchangers Manufactures Pvt. Ltd., v/s.
ACIT (Income Tax Appeal No. 415 of 2004-Bom)
28. Further, Mr. Kaka submitted that, in the following
judgements, the Courts have allowed interest and similar receipts to be
included for working out the exemption under Sections 80IA, 80I, 88C
etc. as long as there is nexus to the business;-
(a) CIT v/s. Meghalaya Steels LTD. [2016] 383 ITR
217 (SC);
(b) CIT v/s. Nagpur Engineering Co. Ltd., [2000]
245 ITR 806 ;
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(c) CIT v/s. Symantec Software India Pvt. Ltd.,
(ITXA No. 1534 of 2012);
(d) PCIT v/s. Dishman Pharmaceuticals and
Chemicals Ltd. [2019] 417 ITR 373;
(e) ACG Associated Capsules Pvt. Ltd., v/s. CIT
[2012] 343 ITR 89 (SC);
(f) Topman Exports v/s. CIT [2012] 342 ITR 49
(SC).
29. In addition, Mr. Kaka also referred to the following
judgements:-
(a) CIT v/s. Paramount Premises Pvt. Ltd., [1991]
190 ITR 259 (Bom);
(b) Odisha Power Generation Co-operation Ltd., v/s.
ACIT [2023] 456 ITR 495 (Orissa);
(c) CIT v/s. Reliance Energy Ltd.,[2022] 441 ITR
346 (SC).
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30. With respect to interest on TDS refund, Mr. Kaka submitted
that tax at source was wrongly deducted by vendors/customers from the
payment made for using the port facility and, therefore, the tax
deducted was directly a part of the sales receipts of the Appellant.
Therefore, the interest for the delay in payment of sales prices has to be
from the eligible business. He submitted that the decision of this Court
in Hiranandani Builders (supra) is directly on the issue of deductibility
of interest on income tax refund under Section 80IA of the IT Act. In
this regard, he further placed reliance on the judgement of the Hon’ble
Supreme Court in CIT v/s. Govinda Choudhury & Sons [1993] 2003 ITR
881 (SC) and the decision of this Court in CIT v/s. Bhansali Engineering
Polymers Ltd., [2008] 306 ITR 194 (Bom).
31. In conclusion, Mr. Kaka submitted that it is
undisputed that the interest income has arisen directly out of the
obligation of developing, operating and maintaining the port facility
and/or of wrongful withholding by vendors from the payments made
for using the port facility. He submitted that, hence, the same squarely
falls within Section 80IA of the IT Act and deduction in respect thereof
ought to be allowed.
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32. On the other hand, Mr. Akhileshwar Sharma, the learned
Advocate for the Respondents, supported the Order dated 28th May,
2020 passed by the ITAT. Mr. Sharma submitted that the mandate of
the IT Act was to allow deduction of profit from any business (eligible
business). However, the Appellant was seeking to read the same as
profit by an undertaking or an enterprise. Mr. Sharma submitted that
the expression profit from business does not refer to the profit of the
assessee but the profit derived from specified business activity.
33. Mr. Sharma further submitted that the mandate of the IT
Act is to promote creation of infrastructure assets. The legislature has
decided to forgo the tax on profit generated in the process of creation of
infrastructure assets. Mr. Sharma submitted that the assessee is free to
deploy its funds in any manner it decides, but the same is immaterial
for the purpose of deduction under Section 80IA. The profit so
deployed may generate further profit, i.e., the fruits of profit. However,
the entire profit made by the assessee in a year is not allowed for
deduction but only that part of the profit which is generated in the
process of creation of eligible infrastructure assets is deductible.
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34. Mr. Sharma further submitted that, in Section 80IA of the
IT Act, the expression “derived by” an undertaking or an enterprise is
limited/ qualified by the expression “from any eligible business”. He
submitted that this limitation on profit for deduction under Section
80IA of the I.T. Act from an eligible business applied to all assessees
whether they were an undertaking or an enterprise.
35. Mr. Sharma further submitted that whether interest income
is income from other sources or is business income derived from an
eligible business is primarily a question of fact for which the ITAT is the
final authority and therefore no question of law arises in the present
case.
36. In support of his submissions Mr. Sharma relied upon the
following judgements :
a) Liberty India Vs. CIT [2009] (183) Taxmann.com
349(SC)
b) Shah Originals Vs. CIT [2023] 156 Taxmann. com 695
(SC)
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c) CIT Vs. Sterling Foods [1999] 104 Taxmann.com 204
(SC)
d) CIT Vs. Swani Spices Mills Pvt. Ltd. (2011) 12
Taxmann.com 432 (BOM)
e) Asian Cement Industries Vs. ITAT (2012) 28
Taxmann.com 290 (J & K)
f) CIT Vs. Common Effluent Treatment Plant (Thane,
Belapur) Association (2010) 192 Taxmann.com 238 (BOM).
37. Mr. Sharma also sought to distinguish various judgements
relied upon by Mr. Kaka. We will deal with the same while dealing with
the judgements relied upon by Mr. Kaka.
ANALYSIS AND CONCLUSIONS
38. By an Order dated 27th March 2023, this Court admitted the
present Appeal on the following substantial questions of law :
“i) Whether, on the facts and in the circumstances of the case, and
in Law, the Tribunal was right in denying the deduction under
section 801A of the Act on business income in the nature of
interest from fixed deposits with the bank?
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(ii) Whether, on the facts and in the circumstances of the case, and
in law, the Tribunal was right in denying the deduction under
Section 801A of the Act on interest on TDS refund?”
39. Before we consider the rival arguments of the parties, it
would be appropriate to refer to the relevant provisions of Section
80IA :
“[(1) Where the gross total income of an assessee includes any
profits and gains derived by an undertaking or an enterprise from
any business referred to in sub-section (4) (such business being
hereinafter referred to as the eligible business), there shall, in
accordance with and subject to the provisions of this section, be
allowed, in computing the total income of the assessee, a
deduction of an amount equal to hundred percent of the profits
and gains derived from such business for ten consecutive
assessment years.]
*****
(4) This section applies to-
(i) any enterprise carrying on the business [of (i) developing or
(ii) operating and maintaining or (iii) developing, operating and
maintaining] any infrastructure facility which fulfils all the
following conditions, namely:-
(a) it is owned by a company registered in India or by a
consortium of such companies [or by an authority or a board
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Government or a State Government or a local authority or any
other statutory body for (i) developing or (ii) operating and
maintaining or (iii) developing, operating and maintaining a
new infrastructure facility;]
(c) it has started or starts operating and maintaining the
infrastructure facility on or after the 1st day of April, 1995:”
… … … … …
“[Explanation.- For the purposes of this clause, infrastructure
facility” means-
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities
being an integral part of the highway project;
(c) a water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste
management system;
(d) a port, airport, inland waterway, inland port or
navigational channel in the sea];]”
40. In our view, the issues that arise for our consideration are
as follows :-
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a) Whether the Appellant is entitled to deduction under
Section 80IA of the IT Act on interest from fixed deposits which
were placed by the Appellant :
i) for planning for replacement of equipment as per the
provisions of the said License Agreement.
ii) due to the tariff dispute in respect of which this Court
granted ad-interim relief to the Appellant with an obligation
to keep aside the differential tariff amount until the dispute
finally get settled/ adjudicated.
b) Whether the Appellant is entitled to deduction under
Section 80IA of the IT Act on the interest received by it on TDS
refunded to it.
41. To consider and decide these issues it would be appropriate
to refer to the case law on the subject referred to by the parties. We will
first refer to some of the relevant judgements relied upon by the
Appellant.
42.1 In CIT Vs. Karnataka State Co-operative Bank (supra) the
question before the Hon’ble Supreme Court was as to whether, on the
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facts and circumstances of the case, the Appellate Tribunal was right in
law in holding that the interest income arising from the investment
made out of the reserve fund is exempt under Section 80P (2) (a) (i) of
the IT Act.
42.2 The Hon’ble Supreme Court held as under :
“……it is not disputed, that the assessee-co-operative bank is
required to place a part of its funds with the State Bank or the
Reserve Bank of India to enable it to carry on its banking
business. This being so, any income derived from funds so
placed arises from the business carried on by it and the assessee
has not, by reason of section 80P(2)(a)(i), to pay income-tax
thereon. The placement of such funds being imperative for the
purposes of carrying on the banking business, the income
derived therefrom would be income from the assessee’s
business……”
(emphasis supplied)
42.3 Hence, the Hon’ble Supreme Court held that, if placement of
funds is imperative for the purposes of carrying on the business, the
interest income derived therefrom would be income from the assessee’s
business and entitled to deduction under Section 80P (2) (a) (i) of the
I.T. Act.
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42.4 Mr. Sharma sought to distinguish this judgement on the
ground that, in this case, the assessee was a bank engaged in carrying
on the business in banking. The issue was with reference to Section 80P
(2) (a) (i) of the IT Act where the deduction was allowed from the whole
of the amount profits and gains of business attributable to any one or
more of such activities.
42.5 In our view, the distinction sought to be made by Mr.
Sharma is not relevant. The Hon’ble Supreme Court has not arrived at
its conclusion on the basis of the word “attributable” found in Section
80P of the IT Act but on the basis that the placement of funds was
imperative for the purpose of carrying on the banking business. Hence,
we are not able to accept the distinction sought to be made by Mr.
Sharma.
43.1 In CIT Vs. Shree Rama Multi Tech Ltd. (supra) the point for
consideration before the Hon’ble Supreme Court was whether interest
accrued on account of deposit of share application money is taxable
income.
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43.2 The Hon’ble Supreme Court held as under :
“…..The common rationale that is followed in all these
judgments is that if there is any surplus money which is lying
idle and it has been deposited in the bank for the purpose of
earning interest then it is liable to be taxed as income from other
sources but if the income accrued is merely incidental and not
the prime purpose of doing the act in question which resulted
into accrual of some additional income then the income is not
liable to be assessed and is eligible to be claimed as deduction.
Putting the above rationale in terms of the present case, if the
share application money that is received is deposited in the bank
in the light of the statutory mandatory requirement then the
accrued interest is not liable to be taxed and is eligible for
deduction against the public issue expenses. The issue of share
relates to capital structure of the company and hence expenses
incurred in connection with the issue of shares are to be
capitalized because the purpose of such deposit is not to make
some additional income but to comply with the statutory
requirement, and interest accrued on such deposit is merely
incidental. In the present case, the respondent was statutorily
required to keep the share application money in the bank till the
allotment of shares was complete. In that sense, we are of the
view that the High Court was right in holding that the interest
accrued to such deposit of money in the bank is liable to be set
off against the public issue expenses that the company has
incurred as the interest earned was inextricably linked with
requirement of the company to raise share capital and was thus
adjustable towards the expenditure involved for the share issue”
(emphasis supplied)
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43.3 Hence, the Hon’ble Supreme Court held that if there is any
surplus money which is lying idle, and it has been deposited in the bank
for the purpose of earning interest, then it is liable to be taxed as
income from other sources but if the income accrued is merely
incidental and not the primary purpose of doing the act in question
which resulted into accrual of some additional income, then the income
is not liable to be taxed and is eligible to be claimed as a deduction.
44.1 In Arul Mariammal Textiles Ltd (supra), the issue before the
Madras High Court was whether total interest income on the monies
kept with the bank by way of margin money for taking foreign Letter of
Credit by the assessee to the tune of Rs. 74,34,478 is eligible to be
claimed as a deduction under Section 80IA of the IT Act.
44.2 Relying on the judgement of the Hon’ble Supreme Court in
Shree Rama Multi Tech (supra), the Madras High Court held as under
“….25. In the instant case, the requirement of the Assessee to
furnish the fixed deposit was a pre-condition to enable the
Assessee to open a foreign Letter of Credit for the purpose of
import of critical components for the manufacture of wind mill.
This incidentally had earned some interest. As pointed out by the
Hon’ble Supreme Court in Shree Rama Multi Tech Ltd., it is not
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sr.1 & 2-itxa-1139-2021.docthe Assessee’s surplus money, which was deposited by way of
fixed deposit, which had earned interest, on the contrary, it was a
pre-condition for the purchaser/Assessee to enable him to import
the critical component for the purpose of manufacturing,
Furthermore, it is not the case of the Revenue that the amount
was deposited in fixed deposit solely for the purpose of earning
interest nor it is the case of the Revenue that the amount, which
was deposited in fixed deposit was a surplus money, which was
lying idle in the hands of the Assessee. Therefore, whatever
income accrued is merely incidental and not the prime purpose of
doing the act in question, which resulted into accural of some
additional income and therefore, the said income is not liable to
be assessed and is eligible to be claimed as deduction. …..”
44.3 Mr. Sharma sought to distinguish the said judgement on the
ground that paragraph 25 thereof makes it clear that the facts of the
said case were different from the facts of the present case. The said case
was in respect of interest earned on margin money kept with the bank
for taking a Letter of Credit. Mr. Sharma submitted that the Court in
paragraph 25 noted that the furnishing of the fixed deposit was a pre-
condition to enable the assesee to open a foreign Letter of Credit. Mr.
Sharma submitted that, in the present case, there is no such pre
condition for the Appellant to place fixed deposits.
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44.4 We are unable to agree with the distinction sought to be
drawn by Mr. Sharma. In our view, the facts of the said case are
applicable to the present case. In the said case, the fixed deposit was a
pre-condition to enable the assessee to open a foreign letter of credit. In
the same way, in the present case, the Appellant had to place fixed
deposits for planning for replacement of equipment as per the
provisions of the said License Agreement and also due to the tariff
dispute in respect of which this Court had granted ad-interim relief to
the Appellant to collect the existing tariff with an obligation to account
for the differential tariff amount and subject to further orders of this
Court. Hence, in our view, the said judgement clearly applies to the
facts of the present case.
45.1 In Indo Swiss Jewels Ltd (supra) the question of law before
this Court was:-
“Whether the findings of the Income-tax Appellate
Tribunal that the interest income received by the assessee
is in the nature of business income and deduction under
sections 80HH and 80-I are available to the assessee is
justifiable in law?”
45.2 This Court held as under :
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sr.1 & 2-itxa-1139-2021.doc“……From the facts and circumstances of the present case it is
clear that the inter-corporate deposits were made by the assessee
from the surplus funds that were set apart for the payment of
imported machinery. That the said deposits were withdrawn and
payment was made towards import of the machinery is also not
questioned by the Revenue. The interest earned on the short-
term deposits of the money kept apart for the purpose of
business has to be treated as income earned on business and
cannot be treated as income from other sources.
We, accordingly, answer the question in favour of the assessee
and against the Revenue…..”
45.3 Hence, in this case, this Court held that interest earned on
short term deposits of money kept apart for the purpose of business has
to be treated as income earned from the eligible business and could not
be treated as income from other sources.
45.4 Mr. Sharma sought to distinguish the said judgement on the
ground that the facts in that case were different. Mr Sharma submitted
that the order for import was already placed by the assessee and the
assessee was waiting for delivery of imported machinery for which
funds were kept apart. Mr. Sharma also submitted that the said
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expression “derived from”.
45.5 We are not able to accept the distinction sought to be made
by Mr. Sharma. The facts in the said case and in the present case are not
different as, in both cases, money was kept apart for the purposes of
business, and actually utilised for the purpose of business. Although the
said judgement contains no discussion on the words “derived from”, the
facts of the said judgement are very similar to the facts of the present
case and hence the ratio of the said judgement applies to the present
case.
46.1 In ITO Vs. Hiranandani Builders (supra) the ITAT, after
considering the decision of the Hon’ble Supreme Court in Liberty India
(supra) (which we have considered later in this judgement), held (i) that
interest on TDS refund received by the assessee would be entitled to
deduction under Section 80IA (ii) that interest received on fixed
deposits kept with banks out of the lease deposit amounts received from
its lessees by the assessee would be entitled to deduction under Section
80IA.
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46.2 Paragraphs 11, 12 and 14 of the said judgement are relevant
and are set out here below :
“11. The first receipt disputed by the revenue relates interest
received from the Income tax department on the refund received
by it. We have earlier noticed that the income derived by the
assessee from the operation of IT Parks and SEZ is the lease
income received from the occupants of the premises. However,
the assessee could not receive the gross lease income from the
lessees, since the lessees are required to deduct tax at source
(TDS) from the lease rent as per the provisions of Income tax
Act. Hence, the non-receipt of the TDS portion of the lease rent
is beyond the control of the assessee. However, the Income tax
department was constrained to refund a portion of TDS, since the
income of the assessee is deductible u/s 801A of the Act. On the
amount so refunded, the Income tax department has paid interest,
as per the provisions of the Act. Under these set of facts, it was
contended by the assessee that the refund of TDS amount is akin
to delayed payment of lease rent along with interest and hence
the interest amount shall partake the character of lease rent as per
the decision of Hon’ble Supreme Court in the case of Govinda
Choudhury & Sons (supra). The assessee has also submitted that
the lessees would not have deducted TDS. if no-deduction
certificate had been issued by the AO in time, in which case, the
question of granting refund along with the interest would not
have arisen. In that scenario, the assessee would have been in a
position to use the TDS portion of the lease rent for business
purposes, including for repaying the loans taken for construction
of IT parks and SEZ. Accordingly, in the alternative, it was
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sr.1 & 2-itxa-1139-2021.docsubmitted by the assessee that the interest on TDS refund should
be netted off against the interest payment, in which case also, the
interest on TDS would get deduction u/s 801A automatically.
12. Thus, we notice that the TDS deduction from lease rental
income was beyond the control of the assessee and also due to
the delay in getting no- deduction certificate from the AO. In
view of the same, the assessee was deprived of funds to the
extent of TDS amount, which would have otherwise used for the
purpose of business purposes including repayment of loan taken
for construction of IT parks and SEZ The Income tax department
was required to pay interest only due to the delay in granting
refund of TDS. In the case of Liberty India (supra), relied upon
by the AO, the assessee therein received DEPB credits as per the
scheme framed by the Government of India. Hence the Hon’ble
Supreme Court held that the primary source of the DEPB receipt
is the scheme framed by the Government. However, in the
instant case, TDS deduction is integral part connected with the
receipt of lease income and the same cannot be separted from the
activity carried on by the assessee. Since the lease income is the
primary source of the assessee and since the TDS has been
deducted from the said primary source and since the assessee
was deprived of a portion of lease rent for a temporary period for
the reasons beyond the control of the assessee, there is some
merit in the contention of the assessee that the interest on TDS
refund should be equated with the interest on delayed payment of
business receipts. In our view, the assessee has got strong case in
the alternative contentions that interest received by it on the TDS
refund should be netted off against the interest expenditure for
the purpose of computing the profits and gains derived from thePage 31 of 63
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sr.1 & 2-itxa-1139-2021.docundertaking, in which case, the interest income need not be
assessed separately and it would automatically get deduction u/s
801A of the Act due to netting off. In view of the above, we
uphold the decision taken by the Ld CIT(A) on this issue.
14. The next receipt relates to the interest received on FDR. The
assessee had received lease deposits from the lessees, which is
required to be returned to them upon vacating the premises.
Since the possibility of vacating the premises in the middle is
always there, in which event the lease deposits are required to be
refunded, the assessee was not in a position to use the entire
lease deposits for business purposes including for repayment of
loans taken by it. Hence, as a prudent business policy, the
assessee was constrained to keep part of the lease deposits into
the Fixed deposits maintained with banks. The said fixed
deposits have earned interest income. Thus, we notice that the
assessee was required to keep part of lease deposits amounts in
fixed deposits out of business compulsion. Since the lease rental
income is the primary source of the assessee, in our view, the
keeping of fixed deposits shall form integral part of the business
of operation of IT parks and SEZ. We also find merit in the
alternative argument of the assessee that the interest income
should be netted off against the interest expenditure, since the
assessee was constrained to keep part of lease deposits into fixed
deposits in view of the peculiar nature of activities of the
assessee instead of using the same for business purposes
including repayment of loan. In view of the above, we do not
find any infirmity in the decision taken by the Ld CIT(A) on this
issue.”
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46.3 Hence, the ITAT held that TDS deduction is an integral part
connected with the receipt of lease income (which is the primary source
of income of the assessee) and the same cannot be separated from the
activity carried on by the assessee. The ITAT also held that assessee was
required to keep a part of the lease deposits amounts in fixed deposits
out of compulsion and therefore was entitled to deduction under
Section 80IA of the IT Act in respect of said interest.
47.1 In PCIT Vs. Hiranandani Builders (supra) this Court agreed
with the view of the ITAT and dismissed the Appeal filed by the
revenue.
47.2 Mr. Sharma sought to distinguish the said judgement in
Hiranandani Builders by submitting that the findings of the ITAT are
essentially factual and based upon the appreciation of the business
activities of the assesee and that the same was rendered in view of the
peculiar nature of the activities of the assessee. Mr. Sharma further
submitted that in the Appeal, this Court did not lay down any law but
merely confirmed the findings of fact of the ITAT.
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47.3 We are unable to accept the said distinction sought to be
drawn by Mr. Sharma. As stated hereinabove, in the said case, the ITAT
clearly held that TDS deduction is an integral part connected with the
lease income of the assessee and the same cannot be separated from the
activity carried on by the assessee. The ITAT also held that the assessee
was required to keep a part of the lease deposit amount in fixed deposits
out of business compulsion and therefore was entitled to deduction
under Section 80IA in respect of the said interest.
47.4 Whilst dismissing the Appeal of the Revenue, this Court
held that it was broadly in agreement with the view of the ITAT and
therefore put its imprimatur on the said decision of the ITAT. Hence,
the distinction sought to be drawn by Mr. Sharma is not of any
substance.
48.1 In CIT Vs. Meghalaya Steels Ltd. (supra) the issue before the
Hon’ble Supreme Court was whether the money received by the
assessee as transport subsidy, interest subsidy and power subsidy
qualified for deduction under Section 80IB (4) of the IT Act.
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48.2 The Hon’ble Supreme Court held as under :
“The judgment in Sterling Foods lays down a very important
test in order to determine whether profits and gains are derived
from business or an industrial undertaking. This court has stated
that there should be a direct nexus between such profits and
gains and the industrial undertaking or business. Such nexus
cannot be only incidental. It therefore found, on the facts before
it, that by reason of an export promotion scheme, an assessee
was entitled to import entitlements which it could thereafter sell.
Obviously, the sale consideration therefrom could not be said to
be directly from profits and gains by the industrial undertaking
but only attributable to such industrial undertaking inasmuch as
such import entitlements did not relate to manufacture or sale of
the products of the undertaking, but related only to an event
which was post manufacture namely, export. On an application
of the aforesaid test to the facts of the present case, it can be said
that as all the four subsidies in the present case are revenue
receipts which are reimbursed to the assessee for elements of
cost relating to manufacture or sale of their products, there can
certainly be said to be a direct nexus between profits and gains
of the industrial undertaking or business, and reimbursement of
such subsidies. However, Shri Radhakrishnan stressed the fact
that the immediate source of the subsidies was the fact that the
Government gave them and that, therefore, the immediate
source not being from the business of the assessee, the element
of directness is missing. We are afraid we cannot agree. What is
to be seen for the applicability of sections 80-IB and 80-IC is
whether the profits and gains are derived from the business.
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sr.1 & 2-itxa-1139-2021.docSo 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……”
48.3 Hence, the Hon’ble Supreme Court held that there should be
a direct nexus between the profit and gains and the industrial
undertaking or business and that such nexus cannot be only incidental.
49.1 In CIT Vs. Govind Choudhury & Sons (supra), the Hon’ble
Supreme Court held as follows :
“6. This brings us to a consideration of the second question. The
sum of Rs. 2,77,692 was received by the assessee as interest on
the amounts which were determined to be payable by the
assessee in respect of certain contracts executed by the assessee
and in regard to the payments under which there was a dispute
between the two parties. The assessee is a contractor. Its business
is to enter into contracts. In the course of the execution of these
contracts, it has also to face disputes with the State Government
and it has also to reckon with delay in payment of amounts that
are due to it, if the amounts are not paid at the proper time and
interest is awarded or paid for such delay, such interest is only an
accretion to the assessee’s receipts from the contracts. It is
obviously attributable and incidental to the business carried on
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sr.1 & 2-itxa-1139-2021.docby it. It would not be correct to say, as the Tribunal has held, that
this interest is totally de hors the contract business carried on by
the assessee. It is well-settled that interest can be assessed under
the head `Income from other sources’ only if it cannot be brought
within one or the other of the specific heads of charge. We find it
difficult to comprehend how the interest receipts by the assessee
can be treated as receipts which flow to it de hors the business
which is carried on by it. In our view, the interest payable to it
certainly partakes of the same character as the receipts for the
payment of which it was otherwise entitled under the contract
and which payment has been delayed as a result of certain
disputes between the parties. It cannot be separated from the
other amounts granted to the assessee under the award and
treated as ‘income from other sources’. The second question is,
therefore, answered in favour of the assessee and against the
revenue.”
49.2 Hence the Court held that if amounts are not paid to the
contractor at the proper time, and interest is awarded or paid for such
delay, such interest is only an accretion to the assessee’s receipts from
the contractors. It is obviously contributable and incidental to the
business carried on by the contractor.
49.3 Mr. Sharma sought to distinguish the said judgement on the
ground that, in the said judgement, the issue was whether interest, in
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the facts of the case, was business income or not. Mr. Sharma further
submitted that the interest was earned not by any act of the assessee but
it was under an arbitration and the interest was awarded due to delayed
payment by the State Government. Mr. Sharma submitted that, hence,
the said judgement is distinguishable on facts.
49.4 We are unable to agree with the said distinction sought to be
drawn by Mr. Sharma. The fact that the interest was awarded by an
arbitration award due to delayed payment by the State Government,
does not in any way detract from the ratio of the said judgement that
interest paid due to delayed payment is only an accretion of income
from business and is therefore attributable and incidental to that
business.
50. The principles derived from the aforesaid judgements relied
upon by Mr. Kaka can be summarized as follows:
a) If placement of funds is imperative for the purpose of
carrying on business, the interest income derived therefrom
would be income from the assessee’s business and is entitled to
the deduction.
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b) If the placement of deposits in the bank is not for parking
surplus funds which are lying idle but for some other purpose
connected with the business, then the interest therefrom is
eligible for the deduction.
c) Interest earned on short term deposits of money kept apart
for the purposes of the business is to be treated as income earned
from the business and cannot be treated as income from other
sources.
d) If the assessee is required to keep amounts in fixed deposits
due to business compulsions, it would be entitled to the
deductions under Section 80IA of the IT Act in respect of the
said interest.
e) There should be a direct nexus between the profits and gains
and the business in order to be entitled to the deduction.
f) Interest on TDS refund received by the assessee would be
entitled to the deduction as TDS deduction is an integral part
connected with the receipt of business income by the assessee
and the same cannot be separated from the business of the
assessee.
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g) If amounts are not paid to the contractor at the proper time,
and interest is awarded or paid for such delay, such interest is
only an accretion to the assessee’s receipts from the contracts
and is clearly derived from the business carried on by the
contractor.
51. Having set down the principles derived from the aforesaid
judgements, first we will consider the issue as to whether the Appellant
is entitled to the deductions under Section 80IA of the IT Act on
interest from fixed deposits which were placed by the Appellant:-
(i) for planning for replacement of equipment as per the
provisions of the said License Agreement;
(ii) due to the tariff dispute in respect of which this Court
granted ad-interim relief to the Appellant with an obligation to
keep aside the differential tariff amount until the dispute finally
gets settled/adjudicated.
52. It is not in dispute that the business carried on by the
Appellant is an “eligible business” under sub-section (4) of Section
80IA. Therefore, the only question that arises is whether the said
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interest earned by the Appellant is profits and gains derived by the
enterprise of the Appellant from such eligible business.
53. In this regard it has to be appreciated that the Appellant had
entered into the said License Agreement with Jawaharlal Nehru Port
Trust (JNPT) to develop and construct a container terminal at JNPT on
Build Operate Transfer (BOT) basis. The Appellant had accordingly
developed and constructed the container terminal on BOT basis. Under
the said License Agreement, the Appellant had a license to operate and
maintain the terminal for a period of 30 years. As a mandatory
condition for operating and maintaining the port, the said License
Agreement [in the clauses set out below], required the Appellant to
replace the equipment at a certain time and to plan for such
replacement of equipment well ahead of such due date for replacement.
“8.34 The Licensee shall, at all times during the Licence Period,
at its own risks, costs, charges and expenses, perform and pay for
maintenance repairs, renewals and replacements in the Licensed
Premises and/or the Project or any parts thereof, whether due to
use and operations or due to deterioration of materials, so that on
the expiry or Termination of this Licence, the same shall, except,
normal wear and tear, be in as good condition as at the
commencement of the Licence.
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sr.1 & 2-itxa-1139-2021.doc8.35 The Licensee agrees and undertakes to replace the major
container handling equipments by new container handling
equipments having specifications not inferior to those of the
equipments being replaced and as per the following provisions:
(i) Replacement of Rail Mounted Quay Crane latest by the 17th
Year from the date of existence of this asset;
(ii) Replacement of Rail Mounted Yard Gantry Crane latest by
the 17th Year from the date of existence of this asset;
(iii) Replacement of Rubber Tyred Yard Gantry Crane latest by
the 12th Year from the date of existence of this asset;
8.36 For the purpose of replacement of equipments under this
Agreement, the date of existence of the replacement assets shall
be as per Appendix 15. The Licensee agrees to plan for
replacement of the equipments well ahead of the due date of
replacement of the equipments as per the provisions of this
Article 8.35 & 8.34. Equipments so replaced as indicated at
Article 8.35 above shall be certified by Independent Engineer to
ensure that they are in conformity with the provisions of
Appendix 7. For this purpose, a new Independent Engineer shall
be appointed by the Licensee duly approved by the Licensor in
accordance with provisions of ARTICLE 6- Any remuneration to
such Independent Engineer shall be borne by the Licensor.”
(emphasis supplied)
54. Prior to signing the said License Agreement, whilst the
bidding process was underway, the Appellant had also confirmed to
JNPT, by a letter dated 19 th February, 2004, that “we confirm that we
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will replace equipments within the stipulated time as per clause 8.35 of
RFP, Volume III”. This undertaking was in addition to the
aforementioned Clauses 8.34, 8.35 and 8.36 of the said License
Agreement and was also made a part of the said License Agreement as
Appendix 15.
55. In accordance with its obligations under the said License
Agreement, the Appellant began the process of planning for
replacement of the equipment well ahead of the due date by setting
aside money in fixed deposits.
56. In addition, the Tariff Authority for Major Ports (TAMP), by
its Order dated 19th January, 2012, had significantly reduced the tariff
charged by the Appellant. The same was challenged by the Appellant in
this Court. This Court, by an Order dated 2 nd July, 2012, granted ad-
interim relief to charge and collect tariff at the rates prevailing prior to
reduction of the tariff. However, the Appellants were directed to keep
account of every such transaction, and the collection of tariff amount
over and above the new tariff prescribed, was made subject to further
orders of this Court.
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57. The financials of the Appellant for AY 2012-13 clearly reflect
the aforesaid. The Appellant had an obligation to replace cranes costing
approximately Rs. 531 crores and also had received differential tariff
under the ad-interim order of this Court aggregating to Rs. 29 Crores.
The Appellant, in order to comply with its obligations for maintaining
and operating the port and accounting for differential tariffs, kept
money in fixed deposits aggregating to approximately Rs. 169 Crores.
Upon this, interest was earned amounting to Rs. 8,67,66,538/-, and on
which deduction under Section 80IA of the IT Act was claimed.
58. In addition, the Appellant also referred to financials for the
years ending 31st March, 2023 and 31st March, 2024 to show the
redemption of fixed deposits by the Appellant for actual purchase of
cranes by the Appellant under the said License Agreement. The
financials for the aforesaid years show that fixed deposits amounting to
Rs. 280 Crores and 51 Lakhs (approximately) and Rs. 16 Crores and 70
lakhs (approximately) were redeemed during these financial years and
cranes worth Rs. 562 Crores were simultaneously purchased.
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59. In our view, the aforesaid facts clearly show that:
a) the placement of fixed deposits was imperative for the
purpose of carrying on the eligible business of the Appellant
b) the placement of fixed deposits is not for parking surplus
funds which are lying idle. This is also demonstrated by the fact
that the Appellant had used these fixed deposits for purchasing
cranes for the eligible business.
c) there is a direct nexus between the fixed deposits and the
eligible business of the Appellant.
60. In these circumstances, in our view, the Appellant is entitled
to the deduction [under Section 80IA of the Act] on the interest earned
from fixed deposits which were placed by the Appellant for planning of
replacement of equipments as per the provisions of the said License
Agreement and due to the tariff dispute.
61. The second issue that arises for our consideration is whether
the Appellant is entitled to the deduction under Section 80IA of the IT
Act on the interest received by it on TDS refunded to it.
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62. With respect to interest on TDS refund, the TDS was
wrongly deducted by the vendors/customers of the Appellant from the
payment made to the Appellant for using the port facility and, therefore,
the TDS wrongly deducted was directly a part of the sales receipt of the
Appellant from the eligible business. The TDS refund arose to the
Appellant due to the excess TDS cut by the customers against payment
to be made to the Appellant and therefore the TDS was a part of the
business receipt of the Appellant. Had the customers not deducted
excess amount of TDS, the Appellant would have received the surplus
funds which would be used for the business purpose/ repayment of
loans etc.
63. The aforesaid facts shows that the TDS refund received by
the Appellant is an integral part connected with the receipt of business
income by the Appellant and the same cannot be separated from the
business of the Appellant. In these circumstances, in our view, the
Appellant is entitled to deduction under Section 80IA of IT Act, on the
interest received by it on TDS refunded to it.
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64. Having arrived at the aforesaid conclusions, it would be
necessary for us to deal with the judgements relied upon by Mr. Sharma
for the Revenue.
65.1 The first judgement relied upon by Mr. Sharma for the
Revenue is Liberty India (supra). In this judgement the Hon’ble
Supreme Court held
a) Section 80IB provides for allowing of deduction in respect of
profits and gains derived from the eligible business. The words
“derived from” are narrower in connotation as compared to the
words “attributable to”. In other words, by using the expression
“derived from”, Parliament intended to cover sources not
beyond the first degree.
b) Sections 80I, 80IA and 80IB of the IT Act have a common
scheme, and if so read, it is clear that the said sections provide
for incentives in the form of deductions which are linked to
profits and not to investment.
c) Analyzing the concept of remission of duty drawback and
DEPB (Duty Entitlement Passbook Scheme), the Hon’ble
Supreme Court was satisfied that remission of duty is on
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account of the statutory/ policy provisions of the Customs Act/
Scheme (s) framed by the Government of India. In these
circumstances, the Hon’ble Supreme Court has that the profits
derived by way of such incentives do not fall within the
expression “profits derived from industrial undertaking” in
65.2 In our view, the judgement in Liberty India (supra), is
distinguishable on facts. In Liberty India (supra), the Hon’ble Supreme
Court held that the words “derived from” intended to cover sources of
first degree i.e. profit and gains derived directly from the business. On
this basis, the Hon’ble Supreme Court held that, analyzing the concept
of remission of duty drawback and DEPB (Duty Entitlement Passbook
Scheme), it was satisfied that the remission of duty was on account of
Statutory/Policy provisions of the Customs Act/ Scheme (s) framed by
the Government of India, and therefore, held that the profits derived by
way of such incentives did not fall within the expression “profits derived
from industrial undertaking” in Section 80IB.
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65.3 In the present case, the interest sought as the deduction is
derived directly from the eligible business of the Appellant as held by us
hereinabove. As held by the Hon’ble Supreme Court in Meghalaya
Steels (supra), there is a direct nexus between the interest and the
business of the Appellant. Therefore, the facts of the present case are
clearly distinguishable from the facts in the case of Liberty India.
65.4 Further, in Hiranandani Builders (supra), the ITAT, after
considering the decision of the Hon’ble Supreme Court in Liberty India
(supra), held that interest on TDS refund received by the assessee
would be entitled to the deduction under Section 80IA of the IT Act,
and that interest received on fixed deposits kept with banks out of the
lease deposit amounts received by the assessee from its lessees would be
entitled to the deduction under Section 80IA. In PCIT Vs. Hiranandani
Builders, this Court agreed with the view of the ITAT and dismissed the
Appeal filed by the Revenue.
65.5 In Meghalaya Steels (supra), the Hon’ble Supreme Court
held as under in respect of Liberty India (supra).
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“..20 Liberty India being the fourth judgment in this line also
does not help the Revenue. What this court was concerned with
was an export incentive, which is very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass
Book Drawback Scheme is not related to the business of an
industrial undertaking for manufacturing or selling its products.
Duty entitlement pass book entitlement arises only when the
undertaking goes on to export the said product, that is after it
manufactures or produces the same. Pithily put, if there is no
export, there is no duty entitlement pass book entitlement, and
therefore its relation to manufacture of a product and or sale
within India is not proximate or direct but is one step removed.
Also, the object behind the duty entitlement pass book
entitlement, as has been held by this court, is to neutralise the
incidence of customs duty payment on the import content of the
export product which is provided for by credit to customs duty
against the export product. In such a scenario, it cannot be said
that such duty exemption scheme is derived from profits and
gains made by the industrial undertaking or business itself. ..”
65.6 The aforesaid also clearly shows that the facts in Liberty
India (supra) are distinguishable from the facts in the present case
66.1 The next judgement relied upon by the Revenue is Shah
Originals (supra). In that case the question that fell for consideration of
the Hon’ble Supreme Court was whether the gain on foreign exchange
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fluctuation in the EEFC account of the assessee partakes the character
of profits of the business of the assessee from exports and can the gain
be included in the computation of deduction under profits of the
business of the assessee under Section 80HHC of the IT Act.
66.2 The Hon’ble Supreme Court has held as follows :
“12. In interpreting Section 80 HHC, the expression “derived
from” has a deciding position with the other expression viz
“from the export of such goods or merchandise”. While
appreciating the deduction claimed as profits of a business,
the test is whether the income/profit is derived from the
export of such good/ merchandise.
12.1 Let us read the very relevant words in Section 80 HHC
of the Act, namely, “derived by the assessee from the export
of such goods or merchandise”, in the background of
interpretation given to the said expression by this Court. The
Section enables deduction to the extent of profits derived by
the assessee from the export of such goods and merchandise
and none else.
12.2 The policy behind the deductions of profits from the
business of exports is to encourage and incentivise export
trade. Through Section 80HHC, the Parliament restricted the
deduction of profit from the assessee’s export of
goods/merchandise. The interpretation now suggested by thePage 51 of 63
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sr.1 & 2-itxa-1139-2021.docassessee would add one more source to the sources stated in
Section 80 HHC of the Act. Such a course is impermissible.
The strict interpretation is in line with a few relative words,
namely, manufacturer, exporter, purchaser of goods, etc.
adverted to in Section 80 HHC of the Act. From the
requirements of sub-sections (2) and (3) of Section 80 HHC,
it can be held that the deduction is intended and restricted
only to profits of the business of export of goods and
merchandise outside India by the assessee. Therefore,
including other income as an eligible deduction would be
counter-productive to the scope, purpose, and object of
Section 80 HHC of the Act.
13. In Topman Exports (supra), a converse case is available,
where a receipt, pursuant to or in terms of a statutory
provision, is treated as income derived from the export
business. The instant case is not proved or stated as falling
within a statutory requirement/benefit. At foremost, by
applying the meaning of the words “derived from”, as held in
the catena of cases, we are of the view that profits earned by
the assessee due to price fluctuation, in the facts and
circumstances of this case, cannot be included or treated as
derived from the business of export income of the assessee.
The assessee can be correct that the computation shall be as
per Sections 28 to 44 of the Act if the receipt or income is
from an export business. As the controversy between the
assessee and the Revenue is whether the profit earned on the
foreign exchange falls under business income or income
from other sources, the interpretation of clause (baa) in
Section 80 HHC is not attracted to the case on hand. Hence,
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exchange fluctuations from the EEFC account does not fall
within the meaning of “derived from” the export of garments
by the assessee. The profit from exchange fluctuation is
independent of export earnings, and the impugned judgment
correctly answers the point.”
66.3 This judgement is also distinguishable on facts. In the said
judgement, the Hon’ble Supreme Court held that the profits earned by
the assessee due to foreign exchange price fluctuation cannot be said to
be derived from the business of export of the assessee under Section
80HHC.
66.4 In the present case, as held by us above, the interest earned
by the Appellant is directly related to the business of the Appellant and
therefore is deductible.
67.1 Mr. Sharma then relied upon the judgement of the Hon’ble
Supreme Court in Sterling Foods (supra). In the said case, the assessee-
firm was engaged in processing prawns and other sea food, which it
exported during AYs 1975-76 and 1976-77. It also earned some import
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entitlements granted by the Central Government under an Export
Promotion Scheme. The assessee was entitled to use the import
entitlement itself or sell the same to others. The assessee sold the
import entitlements that it had earned to others. Its total income for the
aforementioned assessment years included the sale proceeds for such
import entitlements and it claimed relief under Section 80HH of the IT
Act in respect of sale proceeds of the import entitlements.
67.2 Section 80HH provides that if the gross total income of an
assessee includes any profit and gains derived from an industrial
undertaking, the assessee is entitled to be allowed, in the computation
of his total income, a deduction from the profit and gains derived from
the industrial undertaking of an amount equal to 20% thereof.
67.3 On these facts, the Hon’ble Supreme Court held as follows :
“12. We do not think that the source of the import entitlements
can be said to be the industrial undertaking of the assessee. The
source of the import entitlements can,in the circumstances, only
be said to be the Export Promotion Scheme of the Central
Government where under the export entitlements become
available. There must be, for the application of the words
‘derived from` direct nexus between profits and gains and the
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but only incidental. The industrial undertaking exports processed
sea food. By the reason of such export, the Export Promotion
Scheme applies. There under, the assessee is entitled to import
entitlements, which it can sell.The sale consideration there from
cannot, in our view, be held to constitute a profit and gain
derived from the assessees’ industrial undertaking.”
67.4 This judgement is also distinguishable on facts. The Hon’ble
Supreme Court held that the sale consideration of the import
entitlements that the assessee was entitled to under the Export
Promotion Scheme did not have a direct nexus with the industrial
undertaking of the assessee and therefore could not be said to be
derived from the industrial undertaking.
67.5 In the present case, as held by us above, the interest earned
by the Appellant is directly related to the business of the Appellant, and
therefore, is deductible. In these circumstances, the judgement in
Sterling (supra), also does not help the case of the Revenue.
68.1 Mr. Sharma then relied upon the judgement of this Court in
Swani Spice Mills Pvt. Ltd. (supra). The issue which fell for
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determination in this case was whether the interest that was received by
the assessee towards discounting local sale bills and on inter-corporate
deposits constituted income which would fall under the head “profits
and gains of business or profession” or whether it would constitute
income from other sources.
68.2 This Court held that where an assessee invests its surplus
funds in order to earn interest and to obviate its funds lying idle, such
income would not fall for classification as business income. This Court
further held as follows :
” On the explanation of the assessee, which has been extracted
in extenso in paragraph 6 of the order passed by the Assessing
Officer, it is impossible for this court to come to the conclusion
that the interest which has been received by the assessee bears a
direct and proximate relationship with the export activity.
Evidently, the explanation of the assessee is sufficient to indicate
that the funds which are utilized for discounting local sale bills
of private parties are those which are surplus to the business.
These surplus funds of the assessee are utilized for discounting
bills on which the assessee received discounting charges. The
same would hold true insofar as intercorporate deposits are
concerned. Income received by way of discounting charges and
interest on intercorporate deposits would not fall under the head
of profits and gains of business or profession but would fall
under the head of income from other sources. Having no direct
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be wholly kept out of the reckoning for computing the deduction
under section 80HHC.”
68.3 This case is also distinguishable on facts. In this case, this
Court held that the assessee had used its surplus funds for discounting
bills and for placing intercorporate deposits. Therefore, the income
received by way of discounting charges and interest on corporate
deposits would not fall under the head of profit and gains of business or
profession, but would fall under the head of income from other sources.
This court further held that such income had no direct and approximate
nexus with the export activity of the assessee and had to be wholly kept
out of the reckoning to compute the deduction under Section 80HHC of
the IT Act.
68.4 On the other hand, in the present case, the interest earned
by the Appellant was not from parking its surplus funds which were
lying idle, but out of funds invested for the purpose of the business of
the Appellant and on refund of TDS and therefore was deductible under
Section 80IA. This clearly shows that the present case is different on
facts from the case in Swani Spice Mills (surpa).
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69.1 Mr. Sharma then relied upon the judgement of the J & K
High Court in Asian Cement Industries (supra). The issue that arose for
consideration in this case was, whether on the facts and circumstances
of the case, the assessee is entitled to deduction under Section 80IB of
the IT Act on interest earned by it on fixed deposits kept as guarantee
with the Electricity Department and the bank for securing bank limits.
69.2 The Court held as under :
“24.A bare look at section 80-IB(4) would reveal that reference
made to ‘profits and gains derived from such industrial
undertakings’ and not to ‘profit and gains derived from any
business of the industrial undertaking. A conjoint reading of
Section 80-IB(1) and 80-IB(4) would reveal that the expression
‘profits and gains derived from any business’ is to be read as
‘profits and gains derived from the industrial undertaking’ and
the scope and ambit of Section 80-IB(1) is not in any manner
wider than that of 80-IB(4). A holistic view of Section 80. IB
would reveal that what is intended by the Haw Makers to
qualify for deduction is ‘profits and gains derived from the
industrial undertaking’. “There is, therefore, no reason to bring
within the fold of ‘profits and gains derived from industrial
undertakings’ any income beyond the activities of the industrial
undertakings on the ground that the words ‘any business’ finds
expression in 80-IB(1).”
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69.3 This judgement, apart from not being binding on us,
proceeds on the basis that profits and gains should be derived from the
industrial undertaking and not from the business of the industrial
undertaking.
69.4 On the other hand, in the present case, we have considered
whether the profits and gains are derived by an enterprise from any
business referred to in sub section (4) of Section 80IA (eligible
business). On considering the same, it is very clear that the interest
earned by the Appellant is directly related to the business of the
Appellant and therefore is deductible under Section 80IA.
70. The next decision relied upon by Mr. Sharma was the
decision of this Court in Common Effluent Treatment Plant (supra).
This decision is not applicable to the facts of the present case as, in this
case, the assessee was an Association incorporated under Section 25 of
the Companies Act, 1956 and the issue before this Court was whether
the Tribunal was justified in holding that interest on bank deposits,
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other deposits and income tax refunds is not chargeable to tax on the
principal of mutuality.
71. For the aforesaid reasons, in our view, the judgements relied
upon by Mr. Sharma for the Revenue do not take the case of the
Revenue any further.
72. In the impugned order dated 28th May, 2020, in respect of
issues arising for consideration before us, the ITAT held as under
“8. We are of the considered opinion that interest on Income
Tax arises to The assessee as per the statutory provisions of
Income Tax. The law mandate provision of interest to the
assessee for deprivation of use of money due to excess payment
of tax. This interest accrues to the assessee as per statutory
mandate only and it accrues to every assessee under certain
conditions irrespective of manner of earning of the income. The
source of the interest was necessarily to be traced to the fact
that the assessee was deprived of use of money due to excess
payment of taxes and the same would bear no nexus with the
business activities being called out by the assessee. The
argument that lower TDS would have mean lower interest
expenditure is misplaced. The deduction of interest is allowed
to the assessee as per the mandate of Sec. 36(1)(iii) only. The
TDS is also deducted as per statutory mandate only and the
same is applicable to each type of assessee under certain
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sr.1 & 2-itxa-1139-2021.docconditions. Therefore, the said argument, in our opinion, would
not materially alter the basic fact that the interest on Income
Tax refund would bear no nexus with the eligible activities
being carried out by the assessee. Going by the ratio of Liberty
India (supra), we confirm the stand of Ld. CIT(A) in the
impugned order. This ground stand dismissed.
9. Similar analogy would apply to interest on fixed deposits since
the accrual / source of interest would be traced to investment
made by the assessee with the Banks in the shape of FDRs
notwithstanding the motive which led to make those investments.
The assessee’s only source of income may be the earnings from
eligible business but the accrual of interest could not be said to
have any nexus with the eligible business rather the same would
be traced to investments made by the assessee with the Bank.
The words derived from would not cover sources of income
beyond first degree. Therefore, the action of Ld. CIT(A) in
bringing to tax the same, is upheld. Consequently, ground No. II
stands dismissed.”
73. In our view, for all the reasons stated hereinabove by us,
these conclusions and findings of the ITAT are erroneous and are
required to be set aside.
74. For all the aforesaid reasons, we hereby pass the following
Order in this Appeal :
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sr.1 & 2-itxa-1139-2021.docA) The Appeal is hereby allowed and the impugned Order dated 28 th
May, 2020 of the ITAT is partly set aside.
B) The questions of law are answered in the negative i.e. in favour of
the Appellant and against the Revenue.
C) The Revenue is directed to grant deduction under Section 80IA of
the I.T. Act to the Appellant on business income in the nature of
interest from fixed deposits with the bank and on interest on TDS
refund for the A.Y. 2012-13.
75. In the facts and circumstances of the case, there will be no
order as to costs
WRIT PETITION NO. 4963 OF 2021
76. This Writ Petition is filed challenging the impugned order
dated 28th May, 2020 passed by the ITAT. This Writ Petition further
challenges the Order dated 27th April, 2021 passed by the ITAT in
Miscellaneous Application No. 283/MUM/2020 filed by the Appellant
for rectification of the Order dated 28th May 2020 under Section 254 (2)
of the IT Act.
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77. Since, in the judgement passed in Income tax Appeal
No.1139 of 2021, we have allowed the Appeal, partly set aside the
impugned Order dated 28th May, 2020 and answered the questions of
law in favour of the Appellant, this Writ Petition does not survive and
therefore is disposed of as infructuous.
78. In the facts and circumstances of the case, there shall be no
order as to costs.
79. This order will be digitally signed by the Private Secretary/
Personal Assistant of this Court. All concerned will act on production by fax
or email of a digitally signed copy of this order.
[FIRDOSH P. POONIWALLA, J.] [B. P. COLABAWALLA, J.]
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