1. This appeal was admitted and heard on the following substantial question of law:
” Whether the ITAT was correct in law in holding that the interest earned by the assessee on late payment received from the customers is eligible for deduction under section 80-IA of the Income Tax Act, 1961?”
5. Section 80-I of the Act provides for a deduction from the profits and gains, of an amount equal to 20 per cent of thereof in those cases where the gross total income of an assessee includes any profit and gains derived, inter alia, from an industrial undertaking. Sub-section (1) which is relevant for us, read as under:-
“80-I.(1) Where the gross total income of an assessee includes any profits and gains derived from and industrial undertaking or a ship or the business of a hotel or the business o repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words “twenty per cent”, the words “twenty-five per cent” had been substituted”
It is clear from the bare reading of this provision that only such profits and gains which are derived from an industrial undertaking are to be taken into consideration for computing deduction equal 10-20 per cent.
11. The respondent assessee, which is an industrial undertaking, had supplied goods to its various customers which, had been manufactured by it. Some of these customers did not make payment in time. The dues which were payable by those buyers attracted interest on late payment charges. In this manner, ultimately, The payments which were received by the assessee against the supply of goods also included interest on overdue payments.
12. Precisely, this very issue came up for consideration before the Gujarat High, Court in the case of Nirma Industries Ltd. v. Deputy Commissioner of Income Tax, (2006).283 ITR 402 (Guj). That was also a case where interest was received by the assessee from the debtors for late payment of the sale proceeds and the question was as to whether this interest can be treated as the income derived from the business for the purpose of Section 80-1 of the Act. Answering the question in favour of the assessee, the Gujarat High Court relied upon the judgement of the Apex Court in the case of Commissioner of Income Tax, Orissa Vs. Covinda Choudhury & Sons, Gosaninuagaon Orissa, (1993) 203 ITR 881 in which case the Supreme Court had held that interest was of the same nature as other trading receipts the following manner :-
“The assessee Is-a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. 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 en by him. It would not be correct, as the Tribunal has held, to say 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 him de hors the business which is earned on by him: In view, the interest payable to him certainly partakes of the sane. character as the receipts’ for the payment of which he was otherwise entitled under the contract and which payment h3S 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 awards and treated as ‘income- from other sources”.
13. The Gujarat High Court approached the issue from another angle for arriving at the same conclusion. It observed that when the assessee. enters into a contract for sale of its products it could either stipulate . (a) that interest at the specified fate would be charged on the unpaid sale price and added to the outstanding till the point of time or realisation, or (b) that in case of delay the payment for sale of products worth Rs. 100/- to carry the sale price of Rs. 102/- for first months’ delay Rs. 104/ for second month’s delay, Rs. 106 for third month’s delay and so on, if the contention of revenue is accepted merely because the assessee has described the additional sale proceeds as interest in case of contract as per illustration (a) above, such payment would not be profits derived from industrial-undertaking, but in case of illustration (b) above, if the payment $$ described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum end substance these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without delay. Purchaser pays higher sale price if It delays payment of ale proceeds. In other words, this is a converse situation to offering of cash discount. Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds.
14. Thus, according to the Gujarat High Court, when interest is paid on delayed payment, it can be treated as higher sale price which is converse situation to offering of cash discount because the transaction remains the same and there Is no distinction as to the source Looking from” this angle, the interest becomes part of the higher sale price and is clearly derived from the sales made and is not divorced therefrom. It is, thus, the direct result of the sale of goods and the income is derived from the Business of Industrial undertaking.
15. 5ame view is expressed by various other High Courts” m the following Judgement :-
(i) Phatela Cotgin Industries (P) Ltd. Vs. Commissioner of Income Tax. 303 (TR 411 (P&H)
(ii) Commissioner of Income Tax Vs. flender M.acnsil Cears Ltd., 150 ITR 83 (Cal.)
(iii) Tata ponge iron Ltd. Vs. Commissioner of Income Tax 292 ITR 175 (Orissa)
(iv) Commissioner of Income Tax Vs. Indo Matsushita Carbon Co. Ltd., 286 ITR 201 (Mad)
16. There is no reason to depart from the aforesaid view taken consistently by various High Courts, which is in tune with the principle laid down by the Supreme Court ‘in Liberty India (supra). We answer this question in favour of the assessee and against the Revenue.