2018 (1) TMI 1709 - AT - Income Tax

Deduction u/s 80IB - exclusion only the net interest income after adjusting the interest expenditure from the profit eligible for deduction - HELD THAT - It is observed that the case of Spring Merchandisers Pvt. Limited 2012 (8) TMI 1215 - ITAT AGRA decided by the Agra Bench of this Tribunal and cited by the ld. D.R. is distinguishable on facts, inasmuch as, the interest income earned on FDRs in the said case was held to be chargeable to tax under the head income from other sources while interest expenditure constituted the business expenditure of the assessee. In these facts and circumstances of the case, it was held by the Tribunal that netting of the income under one head of income against expenditure under the different head of income is not possible as per law. In the present case, interest income was offered by the assessee to tax as business income and even the interest expenditure was also claimed under the same head as business expenditure. As regards the case of Asian Cement Industries 2013 (1) TMI 178 - JAMMU AND KASHMIR HIGH COURT cited by the ld. D.R., it is observed that even though the issue relating to the netting off interest was raised as question no. 3, the same apparently was not decided by the Hon ble Jammu Kashmir High Court specifically by giving any finding or conclusion. On the other hand in the case of CIT vs.- Warren Tea Limited 2015 (8) TMI 465 - CALCUTTA HIGH COURT relied upon by the ld. CIT(Appeals) in his impugned order has upheld the principle of netting off of interest income against interest expenditure and although the said decision of the Hon ble jurisdictional High Court was rendered in the context of computing business income of the term manufacturing unit as per Rule 8, we are of the view that the same analogy can justifiably be applied even in the present case to hold that only net interest income after adjusting the interest expenditure is liable to be excluded while computing the profit eligible for deduction under section 80IB. Business of the assessee as eligible for deduction under section 80IB. Disallowance under section 14A read with Rule 8D only on the investment in shares of Punjab National Bank

Summary

Issues Involved:
1. Exclusion of net interest income for deduction under section 80IB.
2. Eligibility of the business for deduction under section 80IB and 80IE.
3. Computation of disallowance under section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Exclusion of Net Interest Income for Deduction Under Section 80IB:
The primary issue in the appeals for assessment years (A.Y.) 2008-09, 2011-12, and 2012-13 was whether the net interest income, after adjusting interest expenditure, should be excluded from profits eligible for deduction under section 80IB of the Income Tax Act. The Assessing Officer (AO) disallowed the assessee's claim for deduction on interest income from bank deposits, arguing it was not derived from the eligible business, citing the Supreme Court's decision in Pandian Chemicals Limited vs. CIT. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the netting off of interest income against interest expenses, relying on the Tribunal's decision in DCIT vs. BMW Industries Limited and the Calcutta High Court's decision in CIT vs. Warren Tea Limited. The Tribunal upheld the CIT(A)'s decision, noting the direct nexus between interest income and expenses, and dismissed the Revenue's appeal on this issue for all three assessment years.

2. Eligibility of the Business for Deduction Under Section 80IB and 80IE:
For A.Y. 2011-12 and 2012-13, the Revenue contested the CIT(A)'s acceptance that the process of manufacturing poultry feeds qualified as 'manufacture' under sections 80IB and 80IE. The Tribunal referred to its earlier decision in the assessee's case for A.Y. 2010-11, where it was held that the complete activity from grinding to pelletisation constituted manufacturing, as it resulted in a new product with changed utility. Following this precedent, the Tribunal upheld the CIT(A)'s decision, confirming the business's eligibility for deduction under sections 80IB and 80IE, and dismissed the Revenue's appeals on this issue.

3. Computation of Disallowance Under Section 14A Read with Rule 8D:
The final issue for A.Y. 2011-12 and 2012-13 involved the CIT(A)'s direction to compute disallowance under section 14A read with Rule 8D only on the investment in shares of Punjab National Bank. The Tribunal noted that this issue was also covered by its decision for A.Y. 2010-11, where it was held that disallowance under Rule 8D(2)(ii) could not be sustained if the assessee had sufficient interest-free funds to cover the investments. Additionally, only investments likely to yield tax-free income should be considered for disallowance under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeals on this issue.

Conclusion:
The Tribunal dismissed all three appeals of the Revenue for the assessment years 2008-09, 2011-12, and 2012-13, upholding the CIT(A)'s decisions on the exclusion of net interest income for deduction under section 80IB, the eligibility of the business for deduction under sections 80IB and 80IE, and the computation of disallowance under section 14A read with Rule 8D. The judgments were consistent with the Tribunal's previous decisions in the assessee's own cases for earlier years.