2015 (10) TMI 938 - AT - Income Tax

Disallowance of the deduction claimed u/s 80IB on interest received on FDR - Income from other sources or income from business and profession - AO denied the claim of deduction u/s 80IB taking the view that income earned by way of interest from FDRs cannot be treated as income from industrial undertaking, thus he treated the interest income as Income from Other sources - Held that - Almost all the FDRs were issued in favour of the assessee by the Bank prior to the assessment year 2008-09 as it was necessary and compulsory for getting the CC Limit and L/C in favour of the suppliers. Moreover, there is no change in business and the CC limit on the FDRs continues to be utilized for the same purposes in the assessment year under consideration. Even this issue was raised for the assessment year 2006-07, however, the AO had allowed the deduction after concluding that there was nexus between the interest earned and interest paid. In the assessment year 2008-09 i.e. subject matter of the present appeal, the assessee has earned interest of ₹ 16,97,627/- and has paid the interest of ₹ 26,10,761/-. Thus there was no net interest received by the assessee. In view of the above said discussion and in view of the fact that there is no change in the circumstances for the AY 2008-09 vis-a-vis preceding years i.e. 2006-07 & 2007-08, we therefore, extend the benefit which has been extended to the assessee by the AO for the A.Y. 2006-07 for the present assessment year also. - Decided in favour of assessee.

Summary

Issues:
1) Disallowance of deduction claimed u/s 80IB on interest received on FDR.
2) Charging of interest u/s 234A, 234B & 234C of the Act.
3) Nexus between interest earned on FDRs and interest paid to banks for availing Cash Credit Limit and Letter of Credit.

Analysis:

Issue 1: Disallowance of deduction claimed u/s 80IB on interest received on FDR
The appellant contested the disallowance of deduction under section 80IB on the interest earned on Fixed Deposit Receipts (FDRs). The Assessing Officer (AO) disallowed the deduction, stating that the interest income was not derived from the industrial undertaking, hence not eligible for deduction. The Commissioner of Income Tax (Appeals) upheld this decision citing relevant case laws. However, the appellant argued that the interest income from FDRs was a business income, as the FDRs were deposited as business exigencies and against the compulsion for issuing Letter of Credit. The appellant highlighted the nexus between interest earned and interest paid on loans. The Tribunal found that there was no change in circumstances from previous years where deduction was allowed, thus extending the benefit to the appellant for the current assessment year. Consequently, the orders of the lower authorities were set aside, and the appellant's appeal was allowed.

Issue 2: Charging of interest u/s 234A, 234B & 234C of the Act
The appellant denied the liability of charging interest under sections 234A, 234B & 234C of the Income Tax Act. The appellant argued that the interest charged was contrary to the provisions of law and facts, requesting its deletion. However, the judgment did not delve into this issue specifically, as the focus was primarily on the disallowance of deduction under section 80IB.

Issue 3: Nexus between interest earned on FDRs and interest paid to banks
The appellant emphasized the connection between the interest received on FDRs and the interest paid to banks for availing the Cash Credit Limit and Letter of Credit. The Tribunal acknowledged this nexus, noting that almost all FDRs were issued by the bank before the assessment year for obtaining credit facilities. The Tribunal found that the interest earned was offset by the interest paid, indicating a direct link between the two. As there was continuity in business activities and no change in circumstances, the Tribunal extended the benefit granted in previous years to the appellant for the current assessment year.

In conclusion, the Tribunal allowed the appellant's appeal, setting aside the orders of the lower authorities regarding the disallowance of deduction under section 80IB. The Tribunal recognized the nexus between interest earned on FDRs and interest paid to banks, leading to the allowance of the appellant's claim for deduction.