2016 (7) TMI 1550 - AT - Income Tax

Deduction u/s 80IB - interest earned from fixed deposits which is normally treated as income from other sources and not business income - HELD THAT - As regards Ground No.1 the ld. representatives of both the sides have agreed that the issue involved therein relating to the assessee s claim for deduction under section 80IB in respect of interest earned from Fixed Deposits kept with Bank as margin money is squarely covered in favour of the assessee by the decision of the Hon ble Calcutta High Court in assessee s own case for A.Y. 2003-04 2014 (7) TMI 1313 - CALCUTTA HIGH COURT wherein a similar claim of the assessee for deduction under section 80IB in respect of interest income has been allowed. CIT(Appeals) al lowing the claim of the assessee for deduction u/s 80IB in respect of interest income. Ground No. 1 is accordingly dismissed. Disallowance u/s 14A - HELD THAT - It is observed that the disallowance made by the Assessing Officer under section 14A on account of expenditure incurred by the assessee in relation to the earning of exempt income is sustained by the CIT(Appeals) to the extent of 24, 996/- being 1% of the exempt dividend income. The disallowance under section 14A prior to the introduction of Rule 8D w.e.f. 2008-09 has to be done on some reasonable basis and as agreed by the ld. representatives of both the sides this Tribunal has taken a consistent view that the disallowance u/s 14A to the extent of 1% of the exempt dividend income is fair and reasonable. No infirmity in the impugned order of the CIT(Appeals) restricting the disallowance of 5, 00, 000/- made by the AO u/s 14A being 1% of the exempt dividend income and upholding the same we dismiss Ground No. 2 of the Revenue s appeal .

Summary

Issues:
1. Allowance of deduction under section 80IB for interest earned from fixed deposits.
2. Disallowance under section 14A for expenditure related to earning exempt income.

Analysis:

Issue 1: Allowance of deduction under section 80IB for interest earned from fixed deposits:
The appeal by the Revenue challenges the order of the ld. Commissioner of Income Tax-(Appeals)-1, Kolkata for the assessment year 2006-07. The first ground of appeal questions the allowance of deduction of &8377; 29,62,628/- under section 80IB of the I.T. Act, 1961 for interest earned from fixed deposits. The Tribunal notes that the issue is similar to a previous decision by the Hon'ble Calcutta High Court in the assessee's own case for A.Y. 2003-04. The High Court had allowed a similar claim for deduction under section 80IB, emphasizing the direct nexus between the interest income and the business activity. The Tribunal, finding the facts and material similar to the previous case, upholds the decision of the ld. CIT(A) and dismisses Ground No. 1 of the appeal.

Issue 2: Disallowance under section 14A for expenditure related to earning exempt income:
The second ground of appeal concerns the disallowance under section 14A for expenditure incurred in relation to earning exempt income. The Assessing Officer had disallowed &8377; 5,00,000/-, which was reduced by the ld. CIT(A) to &8377; 24,996/-, being 1% of the exempt dividend income. The Tribunal acknowledges that prior to the introduction of Rule 8D, the disallowance under section 14A had to be based on a reasonable basis. Both sides agree that a disallowance of 1% of the exempt dividend income is fair and reasonable. Consequently, the Tribunal finds no issue with the ld. CIT(A)'s decision to restrict the disallowance to &8377; 24,996/- and upholds the same, leading to the dismissal of Ground No. 2 of the Revenue's appeal.

In conclusion, the Tribunal dismisses the Revenue's appeal, affirming the decisions of the ld. CIT(A) on both grounds. The order was pronounced in the open Court on July 8, 2016.