2016 (5) TMI 1470 - AT - Income Tax

Deduction u/s 80IC on interest earned on FDR - interest income netted off with interest expenditure incurred by the assessee - Held that - The assessee has claimed that the interest income earned by him on FDRs are linked with the business of the assessee and therefore they should be netted off with interest expenditure incurred by the assessee. Most of the fixed deposit receipts are for the purposes of obtaining bank guarantee for the purposes of the business of the assessee. CIT (A) has himself held that Interest earned on FDR placed as margin money for securing letter of credit from bank. Assessee has placed balance sheet on record which shows that assessee has only borrowed funds such as secured loan, unsecured loan and partners capital which is also a borrowings because interest is allowable as expenditure on this sum it might not have claimed such expenditure during the year. It does not have its own reserve and surplus which does not carry interest. All FDRs have been taken from C C account, used for the bank guarantee purposes as submitted by AR, and not disputed by the Ld DR. Interest Income on FDR is also taxed by the AO as business income. It is also apparent that assessee does not have any other business other than the business of eligible undertaking. Further CIT (A) has rejected the reliance on all the decided case laws by the assessee holding that those cases pertain to Section 80 HHC not on section 80IA of the act. Deduction u/s 80IC is allowed from the income derived from industrial undertaking. Therefore, we do not find that word derive can have different meaning for these two sections. In view of this we hold that all those decisions relied by the assessee squarely applies to the facts of the present case as far as the issue of netting off the interest is concerned. In view of this, the ground of the assessee so far as netting off the interest income of ₹ 302269/- is allowed and order of CIT (A) is reversed to that extent. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of deduction u/s 80IC on interest earned on Fixed Deposit Receipts (FDRs).
- Whether interest income derived from FDRs can be netted off against interest expenditure.
- Interpretation of the term "derived" in relation to deductions under different sections of the Income Tax Act.

Analysis:
1. The appeal was filed against the order of the ld CIT (A)-I, Dehradun, for the Assessment Year 2010-11, challenging the disallowance of deduction u/s 80IC on interest earned on FDRs.
2. The assessee argued that the interest income from FDRs was essential for the business and should be netted off against interest paid, as FDRs were used for obtaining bank guarantees and were linked to the business operations.
3. The CIT (A) denied the deduction u/s 80IC, stating that the interest income was not derived from the industrial undertaking, rejecting the netting off of interest paid against interest earned.
4. The assessee, on appeal, provided evidence that FDRs were linked to business activities, supported by the balance sheet showing borrowed funds used for FDRs and reliance on relevant case law.
5. The Revenue argued that interest income from FDRs did not qualify for deduction under u/s 80IC and opposed the netting off of interest.
6. The Tribunal analyzed the facts, noting that FDRs were crucial for obtaining bank guarantees and were directly related to the business, allowing the netting off of interest income against interest expenditure. The Tribunal also compared provisions of deductions under different sections of the Income Tax Act to interpret the term "derived" consistently.
7. Consequently, the Tribunal allowed the appeal, reversing the CIT (A)'s decision on netting off interest income from FDRs, emphasizing the relevance of the term "derived" for deductions under different sections.

This detailed analysis highlights the key arguments, evidence presented, and the Tribunal's decision, providing a comprehensive understanding of the judgment's implications and legal interpretations.