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2010 (11) TMI 767 - AT - Income TaxDisallowance of Deduction u/s 80IB - Held that - Once interest income is held to be assessable under the head income from other sources then it cannot be as such treated as income from business and, therefore, it will not be available for deduction u/s 80IA - Similar view was taken in Nahar Exports Ltd. vs. CIT 2006 (7) TMI 110 - PUNJAB AND HARYANA HIGH COURT - However, once interest income is assessed u/s 56 the expenditures admissible u/s 57(iii) being expenditure incurred wholly and exclusively for the purpose of earning interest income except capital expenditure can be allowed as deduction - Decided in favour of assessee. Telephone expenses - The AO considering the personal use of telephone and mobile phone by the partners disallowed one fifth of the expenditure - The learned CIT(A) confirmed the addition - Held that - On consideration of the above facts and the nature of business of the assessee, held that disallowance is excessive in nature - The same is restricted to Rs.4,000/- in all as against addition of Rs.8,595/ - Thus, appeal of the assessee is partly allowed.
Issues:
1. Disallowance of deduction u/s. 80-IB for interest income. 2. Treatment of interest income earned from borrowed funds. 3. Allowability of expenditure u/s. 57(iii) of the IT Act. 4. Disallowance of telephone expenses. Analysis: Issue 1: Disallowance of deduction u/s. 80-IB for interest income: The assessee claimed deduction u/s 80-IB for interest income earned from borrowed funds. The AO rejected the claim, stating netting off is not allowable as income was earned from other sources. The CIT(A) upheld this decision. The Tribunal referred to a previous case where it was held that once interest income is assessed under "income from other sources," it cannot be treated as "income from business" for deduction under section 80IA. However, expenditures admissible u/s 57(iii) for earning interest income can be deducted. The Tribunal directed the AO to recompute the deduction accordingly, allowing set off of interest expenditure against interest income. Issue 2: Treatment of interest income earned from borrowed funds: The AO treated interest income from GSPL as income from other sources, not setting it off against interest expenditure, reducing the appellant's business income. The CIT(A) decided in favor of the appellant, directing the AO to adjust interest expenditure with interest income and treat the net interest income as income from other sources. The Tribunal confirmed the CIT(A)'s decision, dismissing the Revenue's appeal. Issue 3: Allowability of expenditure u/s. 57(iii) of the IT Act: The Tribunal set aside the lower authorities' orders on the allowability of expenditure u/s 57(iii) of the IT Act, directing the AO to reconsider the issue in accordance with law. It clarified that once income is treated as income from other sources, it cannot be allowed as a deduction u/s 80-IB. The AO was instructed to follow the Tribunal's order in a specific case and provide a fair opportunity for the assessee to be heard. Issue 4: Disallowance of telephone expenses: The AO disallowed a portion of telephone expenses due to personal use by partners, which was confirmed by the CIT(A). The Tribunal found the disallowance excessive and restricted it to Rs. 4,000 instead of the initial Rs. 8,595. The ground of appeal on this issue was partly allowed. In conclusion, the appeal by the assessee was partly allowed on various grounds, including the treatment of interest income, allowance of expenditure, and disallowance of telephone expenses. The Tribunal provided detailed directions for the AO to reevaluate certain aspects of the case in accordance with legal provisions and precedents.
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