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October 11, 2022

Interest on late payments from debtors is deductible under Section 80(I)

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Interest on late payments from debtors is deductible under Section 80(I)

Facts and issues of the facts

The assessee is engaged in business of manufacture and production of rice bran oil, other oils, oil cakes etc. The appellant is assessed to Income Tax by the Assistant Commissioner of Income Tax, Circle-I, Vijayawada at that material point of time. For the assessment year 1997-98, the company filed its returns on 27.10.1997 declaring the total income of Rs.23,67,220/-. While filing its return, the assessee claimed deduction of Rs.2,60,580/- under Section 80(I) of the I.T.  Act.  The return was taken up for scrutiny under Sections  143(2) and 142(1) of I.T. Act. The assessment was completed on 08.05.1998 by allowing deductions only to an extent of Rs.55,924/-.

The reason for restricting the deduction appears to be that the interest paid was not derived from the business of the manufacture and production of the industrial undertaking.Aggrieved by the same, the assessee preferred an appeal to CIT Appeals (IV), Hyderabad .The  Commissioner   of   Appeal found that as the interest amount of Rs.14,60,994/- was received from the debtors, on account of delay in payment of sale proceeds, the same cannot be said to have derived from industrial undertaking and accordingly allowed the appeal in part vide Order dated 31.07.2000.

The assessee carried the matter in appeal before the Income Tax Appellate Tribunal, Visakhapatnam Bench in ITA No.336/Vizag/2000. The Judicial Member of the Tribunal accepted the plea of the assessee in holding that the amount was from the business of the manufacture and production by following the decisions laid down by various Courts. However, the Accountant Member disagreed with the view expressed by the Judicial Member and rejected the plea of the assessee, as such, the matter was referred to a Third Member under Section 255 (4) of the I.T. Act.

The issue before the Third Member was “whether on the facts and  circumstances  of  the  case,  the assessee shall be entitled for deduction under Section 80(I) in respect of  interest  received  on  delayed payment by the customers? The Third Member agreed with the view expressed by the Accountant Member and held that the interest receivable from the debtors on account of the delayed payments of sale proceeds is  not  an  income  derived  from the  business  of  industrial  undertaking.  The   said conclusion was mainly based on the judgment in Nirma Industries vs. ACIT reported in (1995 ITD 199).Aggrieved by the same, the assessee preferred the present appeal.

Ms. Jyothi Ratna Anumolu, learned counsel representing Sri Challa Gunaranjan, learned  counsel  for the appellant, mainly submits that the Tribunal erred in coming to a conclusion that the interest earned from debtors, payable for the delay, in remitting the sale proceeds to the assessee is not an income derived from the industrial undertaking engaged in the business of manufacture and production. She relied upon the judgments of Madras High Court in Commissioner of Income Tax vs. Madras Motors Limited1, and  the judgment of High Court of Gujarat in Nirma Industries Limited vs.  Deputy  Commissioner  of  Income  Tax2. While distinguishing the ratio laid down in Pandian Chemicals Limited Vs. CIT3, would contend that the Tribunal ought to have given the relief to the assessee.

Ms. M. Kiranmayee, learned Standing Counsel for Income Tax, appearing for the respondent, mainly relied upon the judgment in Pandian Chemicals Ltd. [cited 3 supra] and also the judgment of Hon’ble Supreme Court in Commissioner of Income Tax vs. Sterling Food,Mangalore4, to contend that the interest paid on delayed payments cannot form part of same transactions, and as such, it cannot be said that it was a gain derived from its industrial undertaking.

Observation by the court

The Court held that the source of  import entitlement can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements become available. Therefore, there must be, for the application of the words ‘derived from’, a  direct  nexus  between  the  profits  and gains and the industrial  undertaking.  In  the  facts  of  the said case, it was held that a nexus was not direct, but only incidental. Hence, the benefit was not given.The question now is, whether the ratio  laid  down in the judgments referred to above apply to the case on hand?As stated earlier, the wording in  Section  80-HH of the I.T. Act and in Section 80(I) of the I.T. Act, are almost identical, in so far as the words in dispute.

It is to be noted here that in Pandian Chemicals, the assessee made deposits in the Tamil Nadu  Electricity Board and was earning interest thereon. For  getting power connection, every industrial undertaking had to maintain deposit in Electricity Board. The Division Bench held that the interest derived from such deposits could not be said to have been derived from industrial undertaking.This view of the High Court was accepted by the Hon’ble Apex Court. Therefore, any interest earned by the assessee from the bank deposits or from deposits made which would not have a direct nexus with the business/industrial undertaking of the assessee cannot be an incidental income and such income has to  be ignored for claiming benefits under Section 80-HH of the I.T. Act.

In Nirma Industries , the Division Bench of Gujarat High Court dealt with a fact situation where late payment was received by the assessee due to default of the customers. The assessee authority held that the same has nothing to do with the industrial undertaking or the manufacturing activity of the assessee.  On appeal, the Commissioner (Appeals) held that the assessee was entitled to include interest while computing the profits and accordingly granted relief under  Section 80(I) of the I.T. Act. On Revenue’s appeal, the Tribunal disagreed with the view expressed by the Commissioner (Appeals). Challenging the same, a writ petition came to be  filed before the High Court.

As stated earlier, the  fact  situation  in  the  case  on hand also relates to payment of interest on delayed payments of sale proceeds to the assessee. As observed in the Gujarat High Court that there are two methods of realizing sale consideration, the object being to realise sale proceeds at the earliest and without delay. To avoid any loss to the assessee on account of the delayed payments, for the goods supplied, two contingencies can be stipulated (1) charging little higher rate or (2) collecting interest on delayed payments. By this, the transaction would not be incidental or different. In our view, it forms part of  the same transaction as the amount due for the goods sold is being paid with some delay for which an interest is being collected.

Applying the ratio laid down in the above judgments to the case on hand, it is clear that there is direct nexus between the interest received, goods sold and the payments made including interest for the goods sold.  Hence,  it  can be said that the profits and gains derived was from the business of the assessee and accordingly the interest received on delayed payments for the goods supplied/sold would be entitled to relief of exemption under Section 80(I) of the I.T. Act. Accordingly, the appeal is allowed. There shall be no order as to costs.


Miscellaneous petitions pending, if any, shall stand closed.


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