2010 (10) TMI 1201 - AT - Income Tax

Summary

Issues Involved:
1. Restriction on the claim of deduction u/s 80IB.
2. Disallowance of depreciation.
3. Levy of penal interest.

Summary:

1. Restriction on the claim of deduction u/s 80IB:
The assessee's appeal contested the exclusion of interest income, refund of custom duty, rent received, and foreign exchange rate fluctuation from the deduction u/s 80IB. The AO denied the deduction, asserting these items do not form part of the manufacturing activity. The CIT(A) upheld the AO's decision, stating these incomes lack a nexus with the business profits. The Tribunal agreed with the CIT(A) on interest income and rent received, citing the Supreme Court's decision in Liberty India V/s CIT, which requires a direct first-degree nexus between the income and the industrial undertaking. However, the Tribunal allowed the deduction for the refund of customs duty and foreign exchange rate fluctuation, recognizing their direct nexus with the business activity, referencing CIT V/s Dharampal Premchand Ltd and ONGC V/s CIT respectively.

2. Disallowance of depreciation:
The assessee claimed a 10% depreciation rate on residential flats used by workers, arguing they were for commercial use. The AO allowed only 5%, treating them as residential premises. The CIT(A) confirmed this decision. The Tribunal upheld the lower authorities' decision, stating the flats were used for residential purposes, and thus, the depreciation rate for residential buildings applied. The principle of res judicata was deemed inapplicable as each assessment year is a separate unit.

3. Levy of penal interest:
The Tribunal noted that the levy of interest u/s 234B, 234C, and 234D is mandatory and consequential. The assessee will receive the benefit based on the outcome of the appeal.

Conclusion:
The appeal was partly allowed, granting deductions for the refund of customs duty and foreign exchange rate fluctuation, while upholding the disallowance of deductions for interest income and rent received, and confirming the depreciation rate for residential flats. The levy of penal interest was acknowledged as mandatory and consequential.