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2019 (2) TMI 1889 - AT - Income TaxDeduction u/s 10AA - Eligibility of deduction of interest on fixed deposit for the purposes of Section 10AA - AO took a view that interest on fixed deposits is not akin to profits derived as laid down in section 10AA (7) of the Act and consequently such interest income do not form part of the business operation of the SEZ unit - CIT(A) accordingly held that the AO was not justified in excluding the interest income earned from fixed deposits but in the nature of business income for the purposes of computation of deduction under section 10AA - HELD THAT - For determining the scope of section 10AA(7), the reference to the expression derived from is not material. To expound further profits of the business of the undertaking is wider than profits and gains derived by an undertaking - profits derived from export have been equated with business profits of the undertaking as per the formula laid down by section 10AA(7) - the direct nexus or proximity of business income with the export activity is not necessary in view of section 10AA(7) - CIT(A), in our view, has rightly treated the interest income to be eligible for deduction under section 10AA of the Act as per the findings noted in earlier paragraphs. Substantial merit in the action of the CIT(A) in holding the interest income from FDRs to be business income of SEZ unit consistent with the position taken by the assessee in view of the purpose and utilization of FDRs for its business operation. We profitably refer to the decision of Hewlett Packard 2017 (11) TMI 205 - KARNATAKA HIGH COURT wherein it was held that interest income earned by the assessee on the deposits placed by it with banks in the ordinary goods of its business would not be taxable as income from other source under section 56 of the Act and is required to be treated as business income of the assessee regardless of the fact that assessee is not engaged in any banking/financial activity. The interest income thus is eligible for deduction under section 10AA of the Act on such income once it falls in the ambit of the business income - Thus the CIT(A) in our considered view has rightly hold interest income from FDRs to be business income and consequently eligible for deduction under section 10AA of the Act in terms of formula provided under section 10AA(7) - Decided against revenue. Disallowance u/s 14A - Disallowance on the ground that the interest free funds at the disposal of the assessee is in excess of the corresponding investments yielding tax free income - HELD THAT - On such facts, we do not see any reason to interfere with the aforesaid findings in view of the decision of the Hon ble Gujarat High Court in CIT vs Suzlon Energy Ltd. 2013 (7) TMI 697 - GUJARAT HIGH COURT and CIT vs GIDC 2013 (1) TMI 809 - GUJARAT HIGH COURT . Disallowance of interest on advance given for purchase of immovable property - perusal of the order of the CIT(A) shows that the assessee had demonstrated before the first appellate authority that the advances given for purchases of immovable property is far in excess of the interest free funds - HELD THAT - In view of the facts narrated by the CIT(A) towards availability of interest free funds in excess of interest bearing loans for towards advances immovable property, we do not see any reason to interfere with the order of the CIT(A) which is sync with the judicial precedence prevailing in this regard.
Issues Involved:
1. Eligibility of deduction of interest on fixed deposits under Section 10AA of the Income Tax Act. 2. Deletion of disallowance under Section 14A of the Income Tax Act. 3. Deletion of disallowance of interest on advance given for the purchase of immovable property. Issue-Wise Detailed Analysis: 1. Eligibility of Deduction of Interest on Fixed Deposits under Section 10AA: The primary issue concerns whether the interest on bank fixed deposits (FDRs) amounting to ?9,61,73,903/- should be taxed under the head 'Profit and gains of Business' or 'Income from Other Sources' and whether the assessee is entitled to deduction under Section 10AA of the Income Tax Act. The Assessing Officer (AO) contended that the interest income on FDRs does not have a direct nexus with the business operations of the SEZ unit and thus should be classified as 'Income from Other Sources'. Consequently, the AO denied the deduction under Section 10AA, increasing the taxable income by ?1,98,09,270/-. The assessee argued that the FDRs were placed as margin money to avail credit facilities for its SEZ business, making the interest income an integral part of the business operations. The CIT(A) examined the submissions and judicial precedents, concluding that the FDRs were essential for the business operations, and the interest income should be treated as 'business income'. The CIT(A) noted that the interest income is directly linked to the business and thus eligible for deduction under Section 10AA as per the statutory formula provided in Section 10AA(7). The Tribunal upheld the CIT(A)'s decision, emphasizing that the 'profits derived' from the SEZ unit should be equated with the 'profits of the business of the undertaking' as per Section 10AA(7). The Tribunal referred to the Karnataka High Court's decision in CIT vs Hewlett Packard Global Soft Ltd., which supported treating interest income from FDRs as business income. Consequently, the Tribunal found no infirmity in the CIT(A)'s conclusion and dismissed the Revenue's appeal on this ground. 2. Deletion of Disallowance under Section 14A: The second issue pertains to the deletion of disallowance of ?2,07,682/- under Section 14A of the Income Tax Act. The CIT(A) granted relief to the assessee, noting that the interest-free funds available to the assessee exceeded the corresponding investments yielding tax-free income. The Tribunal upheld this finding, referencing the decisions of the Gujarat High Court in CIT vs Suzlon Energy Ltd. and CIT vs GIDC, which support the principle that if interest-free funds are sufficient to cover the investments, no disallowance under Section 14A is warranted. Thus, the Tribunal found no reason to interfere with the CIT(A)'s decision and dismissed the Revenue's appeal on this ground. 3. Deletion of Disallowance of Interest on Advance for Immovable Property: The third issue involves the disallowance of interest on advance given for the purchase of immovable property amounting to ?4,83,675/-. The CIT(A) observed that the assessee had demonstrated the availability of sufficient interest-free funds to cover the advances for immovable property. The CIT(A) referenced several judgments, including CIT vs GSFC Ltd. and CIT vs Reliance Utilities & Power Ltd., which establish that if interest-free funds are available, it is presumed that investments are made from such funds. The Tribunal agreed with the CIT(A)'s findings, noting that the interest-free funds available were in excess of the interest-bearing loans. The Tribunal found the CIT(A)'s decision consistent with judicial precedents and declined to interfere, thereby dismissing the Revenue's appeal on this ground. Conclusion: The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions regarding the eligibility of deduction under Section 10AA, deletion of disallowance under Section 14A, and deletion of disallowance of interest on advance for immovable property. The Tribunal's decision emphasizes the importance of the direct nexus between business operations and income classification for tax purposes.
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