2014 (8) TMI 959 - AT - Income Tax

Deduction u/s 80-IAB - Inclusion of interest in claim of Section 80IAB - interest received by the assessee on advances made by it to its various contractors who are engaged in infrastructure work - Held that - an identical issue has been considered by the Hon ble Gujarat High Court in the case of Nirma Industries, 2006 (2) TMI 92 - GUJARAT High Court where the Hon ble Gujarat High Court has held that the interest received on delayed payment by the debtor is to be included in the profit of the industrial undertaking. In the case in hand, there is no dispute that the assessee has received interest from advances made by it to its contractors engaged in infrastructure work, therefore, the interest received by the assessee has to be considered as interest derived from industrial undertaking eligible for deduction u/s 80-IAB of the Act. To sum up, interest amounting to ₹ 2,92,88,967/- being interest on advances to contractors is to be taxed under the head business income and interest of ₹ 3,93,27,585/- being interest on FDR has to be decided afresh - Decided in favour of assessee.

Summary

Issues:
1. Classification of interest income as "income from other sources" instead of "business income" for deduction u/s 80-IA.
2. Treatment of interest income from bank and contractors under different heads for tax purposes.

Issue 1:
The appeal concerns the classification of interest income by the assessee as "business income" under section 80-IA instead of "income from other sources." The assessee, engaged in infrastructure development, claimed exemption u/s 80-IAB for income from the MIHAN project. The Assessing Officer (AO) noted interest income from contractors and banks under "other income." The AO allowed deduction for interest expenses from FDR income but treated contractor advances interest as "income from other sources." The CIT(A) disagreed with the AO's treatment, directing the interest from bank as "income from other sources" and allowing deduction for bank interest under "business income." The Tribunal directed the AO to re-examine if FDs were from surplus funds or borrowings, restoring the issue for further verification.

Issue 2:
The second issue pertains to interest income received on advances to contractors. The Tribunal referred to a Gujarat High Court decision where interest on delayed payments was considered part of industrial undertaking profit. As the assessee received interest on contractor advances in infrastructure work, it was deemed eligible for deduction u/s 80-IAB. The interest on contractor advances was to be taxed as "business income," while interest on FDR was to be re-evaluated as per directions given. The appeal was allowed in part for statistical purposes.

In conclusion, the Tribunal addressed the classification of interest income and its treatment for tax purposes, emphasizing the distinction between interest from bank and contractor advances. The decision provided clarity on the tax treatment of such income, ensuring compliance with relevant provisions of the Income Tax Act, 1961.