THE questions before the High Court were, Whether on the facts and in the circumstances of the case, the ITAT, is justified in,
1.Holding that interest income from investment in banks be treated as income derived from an industrial undertaking and entitled to deduction u/s. 80 I of the Act?
2.in directing that deduction u/s. 80 I should be allowed without deducting the amount of deduction permissible u/s. 32-AB of the Act?
Under section 80-I of the Income Tax Act a deduction of 20% is given from the gross total income of an assessee, if the income includes any profits or gains derived from an industrial undertaking.
In this case, the assessee derived certain income (a) which was derived from an industrial undertaking and (b) to which section 80-I applied by virtue of sub-section (2) thereof. That income (or rather part of that income) derived from the industrial undertaking was invested in banks as capital upon which interest was earned by the assessee.
The assessee claimed that this interest should also be treated as income derived from the industrial undertaking and accordingly claimed 20% deduction permissible under Section 80-I.The purpose of Section 80-I, as is apparent from sub-section (2), is firstly to encourage establishment of new industries by granting the deduction. However, a detailed reading of that statutory provision suggests that the idea of granting deduction does not appear to stop upon establishment of the new industry, but the purpose continues also to encourage the production in that new industry and accordingly profits derived from the industrial undertakings qualify for deduction upto a certain period.
In the light of the above purpose, section 80-I should not be stretched to the limit where income derived from the industrial undertaking is reinvested by the assessee in a non industrial undertaking for the purpose of earning income from the non industrial undertaking.
Therefore, on first impression, the High Court was inclined not to allow deduction of 20% on the interest earned by the assessee merely because the original nucleus funds which have yielded the interest come from an industrial undertaking.
The High Court’s answer to the first question referred is that, the ITAT was not justified in holding that interest income from investment in banks accruing to the assessee should be treated as ‘income derived from an industrial undertaking’ and such interest income is not entitled to deduction under Section 80- I of the Act.
“gross total income” in Chapter VI-A means the total income computed in accordance with the provisions of the Act before making any deduction under the said Chapter VI-A. Thus, the only deductions which are excluded by that definition are those under Chapter VI-A. More importantly the total income has to be computed in accordance with the provisions of the Income Tax Act. Obviously, the provisions of Income Tax Act includes section 32-AB.
There are two decisions – one by the Delhi High Court and another by the Orrisa High Court on this question. The Delhi High Court held that while computing the ‘gross total income’ for the purpose of section 80-I, the deduction under Section 35-B have to be made first. This decision is in accordance with the contention of the department.
The Orrisa High Court took a contrary view holding that special deduction under Section 80-HH is to be allowed on profits before deducting investment allowance under Section 32-A.
The reasons given by Orrissa High Court did not appeal to this High Court which agreed with the decision of the Delhi High Court in view of the reasons given therein and also in view of the clear words of section 80-B (5).
Therefore the answer to the referred question No. 2 is that the ITAT was not justified in directing that deduction under Section 80-I should be allowed without deducting the amount of deduction permissible under Section 32-AB of the Act.