2017 (11) TMI 1767 - AT - Income Tax

Denial of deduction u/s 80IC - four items of income which were classified by the assessee under the head Other income - Held that - Interest on debtors it is seen as an admitted position that this amount represents interest received from debtors for late payment of sale proceeds. Debtors have obviously arisen from the eligible business of the enterprise. Such interest partakes the character of the sale proceeds to which it relates in so far as the availability of deduction is concerned. The same is, therefore, eligible for deduction as it is income derived from the sale proceeds of the eligible business. Foreign exchange fluctuation is, admittedly, on account of trading transactions. Sale is recorded at the rate of foreign exchange prevalent at the time when exports are made. If, later on, an excess amount is received due to upward revision of foreign exchange rate, such excess amount is nothing, but, part of sale proceeds only, which was earlier recorded at a lower rate in accordance with the foreign exchange rate prevalent at the material time. Thus, foreign exchange fluctuation is very much an item of income derived by the assessee from the business of eligible undertaking. The same is, ergo, held to be eligible for deduction. Interest subsidy - Nature of income as contended by the assessee before the CIT(A) is that it paid interest on loans taken for purchase of plant & machinery and, thereafter, government allowed subsidy for payment of such interest - in support of deduction, AR relied on Circular No.39/2016 which takes cognizance of the Hon ble Supreme Court judgment in Meghalaya Steels Ltd. (2016 (3) TMI 375 - SUPREME COURT) and provides that the subsidy of transport, power and interest given by the government to the industrial undertakings are receipts which have been reimbursed for elements of costs relating to manufacture/sale of products and, accordingly, deduction should be allowed on them. In our considered opinion, this Circular does not advance the case of the assessee because it seeks to provide for deduction in respect of subsidies which go to reimbursement of cost in the production of particular business. When we advert to the facts of the instant case, it is found that the instant interest subsidy is in respect of interest paid on loans taken for purchase of plant & machinery. There being patent difference between the items of subsidy referred to in the Circular and the nature of income earned by the assessee, being, subsidy for interest on loan taken for purchase of plant and machinery, we find the claim of the assessee for deduction wanting on this item of income. The action of the authorities below in not allowing deduction u/s 80IC on this amount, is approved. Royalty/rent received on which deduction u/s 80IC was not allowed. This item, again, in our considered opinion cannot be considered as Profits and gains derived by an enterprise from any business referred to in sub-section (2). Rental income has no relation with the eligible business. The view of the authorities on this issue is also upheld.

Summary

Issues:
- Denial of deduction u/s 80IC in respect of four items of income totaling ?12,21,572

Analysis:
1. Interest on Debtors:
- The appellant disputed the denial of deduction on four items of income under section 80IC, including interest on debtors. The Tribunal found that interest received from debtors for late payment of sale proceeds is eligible for deduction as it is income derived from the sale proceeds of the eligible business. The nexus between the income and the business existed, making it eligible for deduction under section 80IC.

2. Foreign Exchange Fluctuation:
- The Tribunal considered foreign exchange fluctuation of ?1,94,060 on trading transactions as part of the sale proceeds derived by the assessee from the eligible business. The excess amount received due to an upward revision of foreign exchange rate was held to be eligible for deduction under section 80IC as it is directly related to the business activities.

3. Interest Subsidy:
- The interest subsidy of ?2,05,500 was denied deduction under section 80IC. The appellant contended that the subsidy was received for interest paid on loans taken for the purchase of plant & machinery. However, the Tribunal held that the nature of this subsidy did not align with the subsidies reimbursing costs related to the manufacturing or sale of products. As a result, the deduction on this item was not allowed under section 80IC.

4. Royalty/Rent Received:
- The last item in dispute was royalty/rent received amounting to ?3 lakh, on which deduction under section 80IC was not allowed. The Tribunal concurred with the authorities that this income was not derived from the eligible business and, therefore, was not eligible for deduction under section 80IC.

5. Conclusion:
- The Tribunal partly allowed the appeal, upholding the denial of deduction on interest subsidy and royalty/rent received, while allowing the deduction on interest on debtors and foreign exchange fluctuation. The decision was pronounced on 15th November 2017.