2016 (8) TMI 1191 - HC - Income Tax

Claim of deduction u/s. 80IA on interest received on margin money - Held that - The income earned from fixed deposit placed for business purpose cannot be treated as income from other source but must be seen as part of the assessees business income. In the present case also the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions and therefore the income received thereupon cannot be termed to be income from other sources. See EMPIRE PUMPS PVT. LTD. Versus ACIT 2014 (11) TMI 563 - GUJARAT HIGH COURT - Decided in favour of the assessee

Summary

Issues Involved:
1. Deduction under Section 80IA on interest received on margin money.
2. Netting of interest for deduction under Section 80IA.
3. Depreciation on plant and machinery without proper bills.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA on Interest Received on Margin Money:
The primary issue revolves around whether the interest received on margin money qualifies for deduction under Section 80IA. The Assessing Officer (AO) disallowed the deduction, asserting that the interest income was not derived from the industrial undertaking. This stance was initially upheld by the Commissioner of Income Tax (Appeals) [CIT (A)]. However, the Income Tax Appellate Tribunal (ITAT) reversed this decision, allowing the deduction. The department argued that the interest income did not have a direct nexus with the industrial undertaking, citing cases like Pandian Chemicals Ltd and K. Ravindranathan Nair to support the distinction between "income derived from" and "income attributable to" an industrial undertaking. Conversely, the assessee relied on a precedent set by the Gujarat High Court in Tax Appeal No. 371 of 2002, which supported the inclusion of such interest under business income eligible for deduction.

2. Netting of Interest for Deduction under Section 80IA:
In Tax Appeals No. 2093 and 2094 of 2010, the issue of netting interest was raised. The ITAT set aside this issue to the AO for reconsideration, implying that the net interest (interest received minus interest paid) should be considered for deduction under Section 80IA. The department’s contention was that the interest received on margin money should not be netted against interest paid, as the former was not directly derived from the industrial undertaking.

3. Depreciation on Plant and Machinery Without Proper Bills:
The AO disallowed the depreciation claim on certain plant and machinery due to the absence of proper bills. The ITAT reversed this disallowance, emphasizing that the physical availability and use of the machinery for business purposes were sufficient grounds for allowing depreciation. The assessee argued that the machinery was indeed used for business, and the onus was on the revenue to prove otherwise if there were doubts about the existence or use of the machinery.

Conclusion:
The High Court, after considering the arguments and precedents, upheld the ITAT's decisions. It ruled that the interest on margin money should be included as part of business income eligible for deduction under Section 80IA, aligning with the precedent that such income, if linked to business operations, qualifies for deduction. The court also supported the ITAT’s stance on netting interest and the allowance of depreciation on machinery, emphasizing the necessity of practical business considerations over strict documentation requirements. Consequently, the appeals were dismissed, and the issues were resolved in favor of the assessee.