2013 (11) TMI 563 - AT - Income Tax

Deduction u/s 10AA/10A - Netting of interest income and expenditure - Nexus of interest income and expenditure - Held that - it is settled position in law that interest income is to be assessed as income from other sources and not under the head business income for the purpose of deduction under Section 10AA/10A. However, this issue in respect of netting i.e. interest income and expenditure income has to be netted of, if there is a nexus. There is no dispute in respect of nexus as the interest income earned by the assessee is earned on FDs kept with the bank as margin money against credit facility - If after netting of interest it is found that interest income is more than then the surplus income has to be treated as income from other sources and if interest expenditure is more than the interest income, then no deduction is to be made while calculating deduction under Section 10AA/10A. Disallowance u/s 36(1)(iii) - Interest attributed to capital borrowed for purchase/acquisition of assets - Held that - Under the provisions of section 36(1)(iii), any interest on borrowings made for acquisition of assets for extension of existing business is required to be capitalized till the asset is first put to use - Authorities below have proceeded with the presumption that the assets had been acquired from borrowed funds. However, no basis for such finding has been given. The assessee has pointed out that most of the payments had been made in earlier years in which year there was no disallowance of interest. Therefore, in the earlier years, the payments were made from own funds - source of current payment is easily explained from own funds. Therefore, when the payment for acquisition of assets have been made from own funds, there cannot be any case of disallowance of interest - Decided in favour of assessee. Deduction u/s 10AA - Services under SEZ rules - Whether trading is covered by the term services - Held that - assessee is engaged in trading of re-export of imported goods and, therefore, the assessee is entitled for deduction under Section 10AA - SEZ Act under Section 51, it has been clearly provided that the provision of SEZ Act will override the provision of any other Act, meaning thereby the provision provided under the SEZ Act has to override on the provision of Section 10AA of the Income Tax Act. Under the rules, it is not provided but under Section 51 of the SEZ Act - Following decision of CIT Vs. Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court and Deputy Commissioner of Income-tax, Circle-2 Versus Goenka Diamond & Jewellers Ltd. 2012 (3) TMI 258 - ITAT JAIPUR - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of interest income from Fixed Deposits (FDs) as "income from other sources" vs. "business income."
2. Netting of interest income against interest expenditure for the calculation of deductions under Sections 10AA and 10A.
3. Disallowance of interest under Section 36(1)(iii) for capital borrowed for asset acquisition.
4. Eligibility for deduction under Section 10AA for trading activities in SEZ.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income from FDs:
The primary issue was whether the interest income from FDs kept as margin money with banks against credit facilities should be treated as "income from other sources" or "business income." The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated this interest income as "income from other sources," reducing the deduction under Sections 10AA and 10A. The Tribunal upheld this view, stating that it is a settled position in law that interest income is to be assessed as "income from other sources" and not under the head "business income" for the purpose of deduction under Sections 10AA and 10A.

2. Netting of Interest Income Against Interest Expenditure:
The AO and CIT(A) denied the netting of interest income against interest expenditure. However, the Tribunal, referencing the Hon'ble Supreme Court decision in [2012] 343 ITR 89, allowed the netting of interest. The Tribunal directed that if there is a nexus between the interest income and expenditure, the netting should be allowed. The AO was instructed to compute the net interest income or expenditure and treat any surplus as "income from other sources."

3. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed interest under Section 36(1)(iii) by treating it as interest attributable to capital borrowed for asset acquisition, resulting in disallowances of Rs.52,18,944/- for 2006-07 and Rs.17,06,082/- for 2007-08. The CIT(A) confirmed these disallowances. However, the Tribunal, referencing the decision in Mehta Brothers Gems Pvt. Ltd. Vs. ACIT, noted that the payments for asset acquisition were made from the assessee's own funds, not borrowed funds. Consequently, the Tribunal set aside the CIT(A)'s order and deleted the addition, allowing the issue in favor of the assessee for both years.

4. Eligibility for Deduction under Section 10AA for Trading Activities in SEZ:
The AO disallowed the deduction under Section 10AA, arguing that the exemption is applicable only for manufacturing units, not for trading activities. The CIT(A) reversed this decision, allowing the deduction by interpreting "services" under the SEZ Act to include trading activities. The Tribunal upheld the CIT(A)'s decision, referencing the SEZ Act, which defines "services" to include trading. The Tribunal also noted that under Section 51 of the SEZ Act, the provisions of the SEZ Act override other laws, including the Income Tax Act. The Tribunal cited the Jaipur Bench decision in Goenka Diamonds and Jewellery Limited, confirming that trading activities qualify for deductions under Section 10AA.

Conclusion:
- Appeals of the assessees for the assessment years 2006-07 & 2007-08 were allowed in part.
- Appeals of the department were dismissed.
- The Tribunal upheld the CIT(A)'s decision on allowing deductions under Section 10AA for trading activities and the netting of interest, while deleting the disallowance of interest under Section 36(1)(iii).