2007 (5) TMI 358 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 80-IB on interest income from margin money deposited with the bank.
2. Netting of interest expenditure against interest income.

Summary:

Issue 1: Deduction u/s 80-IB on interest income from margin money deposited with the bank

The assessee-company, engaged in manufacturing telecommunication equipment, claimed a deduction u/s 80-IB of the Income-tax Act, 1961, on interest income from FDRs with banks against margin money and corporate loans. The Assessing Officer (AO) assessed this interest income as "income from other sources" and denied the deduction u/s 80-IB, asserting that the interest income was incidental to the business and not directly derived from the industrial undertaking.

The CIT (Appeals) allowed the deduction, holding that the FDRs were purchased out of business compulsion and were inextricably linked with the business activities, thus qualifying the interest income for inclusion in the profits of the business for computing the deduction u/s 80-IB.

Issue 2: Netting of interest expenditure against interest income

The revenue appealed against the CIT (Appeals) order, arguing that interest earned on bank deposits cannot be considered as derived from the industrial undertaking. The learned DR cited the Supreme Court's decision in CIT v. Sterling Foods, emphasizing the need for a direct nexus between the profits and the industrial undertaking.

The Tribunal considered the rival contentions and the case laws cited. It noted that the deposit was given for securing bank guarantees and LCs, essential for business operations, and was funded by borrowed money. The Tribunal referred to the jurisdictional High Court's decision in CIT v. Shri Ram Honda Power Equip. Ltd., which categorized interest income from surplus funds as "income from other sources" and not business income.

The Tribunal concluded that interest income cannot be said to have been derived from the industrial undertaking for the purpose of deduction u/s 80-IB. However, it directed the AO to allow the netting of interest expenditure against the interest income while taxing the net interest income u/s 56 as "income from other sources." The AO was also instructed to recalculate the deduction u/s 80-IB by excluding the interest expenditure from the profit & loss account of the industrial undertaking.

Conclusion:

The appeal of the revenue was allowed in part. The Tribunal upheld the AO's treatment of interest income as "income from other sources" but directed the AO to allow netting of interest expenditure and to recalculate the deduction u/s 80-IB accordingly.