2014 (7) TMI 1313 - HC - Income Tax

Deduction u/s 80IB - interest earned by the assessee on account of fixed deposits was also made from out of the borrowed fund - CIT(A) allowed an appeal preferred by the assessee holding, inter alia, that the interest earned by the assessee on account of fixed deposits was also made from out of the borrowed fund as endorsed the views of the CIT(A) - HELD THAT - In the present case it is difficult to say that the interest earned by the assessee from the buyers of the goods on account of delayed payment of the sale proceeds does not have any direct nexus with the business of the assessee. Similarly, the interest received by the assessee on account of fixed deposits made for the purpose of providing margin money to the lending bank also has a direct nexus because the finding of the CIT (A) is, which is not disputed before us, that for the purpose of making such deposit the assessee had also borrowed money from the bank. The resultant effect is that if a deposit of ₹ 10/- is to be made by way of margin money for borrowing ₹ 100/-, the assessee has to borrow ₹ 110/- out of which ₹ 100/- can be used for his business and ₹ 10/- can be invested by way of margin money. When he is paying interest for ₹ 110/- and receiving interest on the amount of ₹ 10/-, it can only be said that he is really paying interest for ₹ 100/- which he originally needed for the business. The income arising out of the deposit made by him is, therefore, his business income. We are of the opinion that the CIT (A) and the tribunal have taken a possible view. There is no reason for us to interfere. The appeal is, therefore, dismissed.

Summary

Issues Involved:
Interpretation of Section 80 IB for deduction of interest earned by the assessee from customers and fixed deposits.

Analysis:
The appeal before the High Court of Calcutta involved a challenge to a judgment and order by the Income Tax Appellate Tribunal dismissing the revenue's appeal. The issue at hand was whether the interest earned by the assessee from customers on delayed payments and from fixed deposits for margin money was eligible for deduction under Section 80 IB. The assessing officer initially ruled against the assessee, but the CIT(A) allowed the appeal, emphasizing that the interest earned was from borrowed funds. The Tribunal upheld the CIT(A)'s decision, leading to the revenue's appeal.

The High Court analyzed various judgments to determine the interpretation of "derived from" in similar contexts. Reference was made to cases such as Pandian Chemicals Ltd., CIT vs. Sterling Foods, and Liberty India vs. CIT. These cases highlighted the importance of establishing a direct nexus between the income earned and the business activity pursued by the assessee. In the present case, the interest earned by the assessee from customers and fixed deposits had a direct connection to the business operations. The assessee had borrowed funds for business purposes, and the interest earned helped mitigate the increased borrowing due to delayed payments.

The Court noted that the interest earned by the assessee was essentially business income, as it was directly linked to the borrowed capital used for business activities. The example provided illustrated that the interest earned on fixed deposits for margin money was essentially a part of the business income, as it offset the interest paid on the borrowed funds. Therefore, the Court concluded that the CIT(A) and the Tribunal had taken a reasonable view, and there was no justification for interference. Consequently, the appeal was dismissed, affirming the decision in favor of the assessee.