2011 (9) TMI 797 - HC - Income Tax

Deduction u/s 80-IA - Deduction u/s 35D - By its order dated 9.7.2008 following the judgment of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip 2007 -TMI - 2891 - HIGH COURT DELHI held the aforesaid substantial question of law in favour of the assessee and against the revenue Regarding deduction u/s 35D - Apex Court in the case of Punjab Industrial Development Corpn. Ltd. v. CIT 1996 -TMI - 5589 - SUPREME Court where it was held that the payment made to the Registrar of Companies is to be treated as a capital expenditure - The deduction was claimed on the ground that Section 35D provides for amortization of preliminary expenses in respect of fees paid to the Registrar of Companies and expenditure incurred towards public subscription of shares. Once the condition of Section 35D is fulfilled the assessee is entitled to the deduction - Decided in favor of the assessee

Summary

Issues:
1. Computation of deduction under Section 80-IA of the Act for interest income.
2. Allowability of deduction under Section 35D of the Act for specific expenditures.

Issue 1: Computation of Deduction under Section 80-IA of the Act for Interest Income

The High Court considered whether interest income earned by the assessee, after deducting interest payments on borrowed funds, should be taken into account for the purpose of computation deduction under Section 80-IA of the Act. The court referred to a Division Bench judgment in the case of CIT v. Gokuldas Exports, which favored the assessee based on the interpretation of the law by the Delhi High Court. The court emphasized the importance of applying the nexus test to exclude items that do not form part of the profits derived from the business of exports. It was clarified that interest earned on fixed deposits for availing credit facilities from the bank should be treated as income from other sources, not business income. The judgment highlighted the necessity of showing the nexus between obtaining the loan, paying interest, and earning interest on fixed deposits to apply the netting principle. Ultimately, the court answered the first substantial question of law in favor of the assessee, following the precedent set by previous judgments.

Issue 2: Allowability of Deduction under Section 35D of the Act for Specific Expenditures

Regarding the second substantial question of law, the assessing authority had initially denied the claim of the assessee based on a previous judgment that treated payments made to the Registrar of Companies as capital expenditure. However, the assessee claimed deduction under Section 35D of the Act not on the grounds of revenue expenditure but based on the provision for amortization of preliminary expenses. The court noted that once the conditions of Section 35D are fulfilled, the assessee is entitled to the deduction. The Tribunal's decision in favor of the assessee was upheld, emphasizing that there was no error in the finding. Consequently, the second substantial question of law was also answered in favor of the assessee, leading to the dismissal of the appeal.

In conclusion, the High Court's judgment addressed the issues related to the computation of deductions under Section 80-IA and the allowability of deductions under Section 35D of the Act, providing detailed analysis and legal interpretations to support its decisions in favor of the assessee in both instances.