2017 (5) TMI 1763 - AT - Income Tax

Allowability of deduction u/s 10A in respect of the interest income on fixed deposit - AO has disallowed the claim by holding that the interest income has no nexus with the business activity of the assessee and therefore the same cannot be treated as business income of the undertaking - HELD THAT - In case if the interest income is earned from the deposits made in connection with the business activity of the undertaking then the same is eligible for deduction under Section 10A/10B - In the case of the assessee neither the AO nor the CIT (Appeals) has verified this fact though the assessee in its reply before the Assessing Officer has mentioned that the interest income is earned on the deposits made for securing the Bank Guarantee. Accordingly AO is directed to verify the fact that the interest income in question has been earned from the deposits made for securing the Bank Guarantee and then decide the issue in the light of the decision of Hon ble jurisdictional High Court in the case of CIT Vs. Motorola India Electronics Pvt. Ltd 2014 (1) TMI 1235 - KARNATAKA HIGH COURT - Appeal of revenue is allowed for statistical purpose.

Summary

Issues involved:
1. Allowability of deduction under Section 10A of the Income Tax Act, 1961 for interest income on fixed deposit.

Detailed Analysis:

Issue 1: Allowability of deduction under Section 10A for interest income on fixed deposit

The appeal was directed against the order of the Commissioner of Income Tax (Appeals)-12, Bengaluru for the Assessment Year 2010-11. The primary contention raised by the revenue was regarding the allowability of deduction under Section 10A of the Income Tax Act, specifically in relation to the interest income on fixed deposit. The Assessing Officer had disallowed the claim of deduction under Section 10A for the interest income on fixed deposit, stating that it lacked nexus with the business activity of the assessee.

Upon appeal, the assessee cited the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Motorola India Electronics Pvt. Ltd. 225 Taxman 11, and the CIT (Appeals) ruled in favor of the assessee, allowing the claim. The Departmental Representative argued that the interest income on deposits did not have a direct or indirect nexus with the business of the industrial undertaking, unlike the case of Motorola India Electronics Pvt. Ltd.

In response, the Authorized Representative of the assessee contended that the interest earned on fixed deposits made for obtaining Bank Guarantee had a direct nexus with the business of the industrial undertaking, making it eligible for deduction under Section 10A. The Authorized Representative also submitted a letter dated 28.2.2014 before the Assessing Officer to support this claim.

The Tribunal noted the decision of the Hon'ble High Court in the case of CIT Vs. Motorola India Electronics Pvt. Ltd., emphasizing that if the interest income is earned from deposits linked to the business activity of the undertaking, it is eligible for deduction under Section 10A/10B of the Act. However, it highlighted that neither the Assessing Officer nor the CIT (Appeals) had verified this fact in the case at hand, despite the assessee's explanation regarding the interest income earned on deposits made for securing Bank Guarantee.

Consequently, the Tribunal directed the Assessing Officer to ascertain whether the interest income in question was indeed earned from deposits made for securing the Bank Guarantee and then make a decision based on the principles outlined in the aforementioned High Court decision. As a result, the appeal of the revenue was allowed for statistical purposes.

This detailed analysis provides a comprehensive overview of the legal judgment, focusing on the issues raised and the Tribunal's decision regarding the allowability of deduction under Section 10A for interest income on fixed deposit.