2012 (8) TMI 1215 - AT - Income Tax

Summary

Issues Involved:
1. Denial of set off of interest earned on FDR against the interest paid on bank borrowings for deduction u/s 80IB.
2. Determination of whether interest earned on FDR can be considered as income derived from manufacturing activity for deduction u/s 80IB.
3. Consideration of netting of interest earned against interest paid for the purpose of deduction u/s 80IB.

Summary:

1. Denial of Set Off of Interest Earned on FDR:
The appellant argued that the CIT(A) erred in denying the set off of interest earned on FDRs, which were made to provide margin money against the letter of credit issued by the bank, against the interest paid on bank borrowings while calculating the quantum of deduction admissible u/s 80IB. The FDRs were purchased out of the company's bank account maintained for margin money purposes. The AO disallowed the deduction u/s 80IB on this income, following the assessment order for AY 2005-06, which held that the interest on FDR is not an income derived from manufacturing activities.

2. Interest Earned on FDR as Income Derived from Manufacturing Activity:
The appellant contended that the interest earned had a direct nexus with the interest paid and only net interest, if positive, could be considered for disallowance of deduction u/s 80IB. The CIT(A) confirmed the addition, stating that the interest income on FDR is not derived from the business of the industrial undertaking and is only incidental income. The CIT(A) relied on case laws such as CIT Vs. Madras Motors Ltd., which held that interest earned from bank deposits does not have a direct nexus with the industrial undertaking and is not eligible for deduction u/s 80IB.

3. Netting of Interest Earned Against Interest Paid:
The appellant's alternative argument was that if the interest on FDR is treated as income from other sources, then u/s 57, the interest expenditure should be deducted from such income. The CIT(A) rejected this argument, stating that there is no direct nexus between the borrowed funds and the investment made in the FDRs. The interest expenditure on borrowed funds is for the purpose of business and not for making FDRs, thus cannot be netted against the interest earned on FDRs. The Tribunal upheld this view, citing that netting of income under one head of income against expenditure under a different head of income is not permissible as per law.

Conclusion:
The Tribunal dismissed the appeal, affirming that the interest income on FDRs is not eligible for deduction u/s 80IB as it is not derived from the business of the industrial undertaking. The alternative claim for netting of interest was also rejected, maintaining that interest expenditure on borrowed funds cannot be netted against the interest earned on FDRs. The decision was consistent with the Tribunal's previous ruling for AY 2005-06, which had become final.