2016 (10) TMI 996 - AT - Income Tax

Allowability of deduction u/s 80IAB on the interest - netting off of interest expenses against the interest income - Held that - The interest income received by the assessee is inextricably linked with the business of the Assessee and is therefore eligible for deduction u/s.80IAB of the Act more so when interest income has been taxed as business income and not as income from other sources by the Revenue meaning thereby that the income from interest being business income has accepted by Revenue. We are of the view that the interest income is eligible for deduction u/s 80IAB of the Act. Further we also find that while deciding the issue of netting off of interest expenses against the interest income, ld.CIT(A) has allowed netting of interest income against interest expenses for the reason stated by ld.CIT(A) in his order. In such a situation the netting off of interest income against the interest expenses also does not require interference. We thus allow this ground of the Assessee. Disallowance u/s.14A - Held that - In the present case, it is an undisputed fact that the assessee has earned exempt income of ₹ 33,01,981/- and the disallowance u/s.14A r.w.s.Rule 8D has been worked out at ₹ 4,19,65,021/- which is about 1270 times the exempt income and thus the disallowance u/s.14A of the Act worked out by the AO is much more than the income liable to tax. Considering the facts of the present case in the light of the decision of Hon ble Delhi High Court in the case of Joint Investments (P.) Ltd. vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT ) and in the absence of any contrary binding decision pointed out by Revenue, we are of the view that the disallowance as worked out by the AO is not warranted. We therefore direct that the disallowance u/s.14A in the present case be restricted to ₹ 33,01,981/-, being the exempt income, earned by the assessee. Thus, this ground of assessee is allowed.

Summary

Issues Involved:
1. Deletion of addition made by AO by netting of interest income against interest expenses.
2. Eligibility of interest income for deduction u/s 80IAB.
3. Set off of share issue expenses against interest income.
4. Disallowance u/s 14A.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO by Netting of Interest Income Against Interest Expenses:
The Revenue challenged the CIT(A)'s decision to delete the addition made by the AO by netting of interest income of ?19,58,34,587 against interest expenses of ?135.37 crores. The AO had denied the claim of deduction u/s 80IAB on the interest receipts, arguing that the interest income had no relationship with the business of development of SEZ and was not derived from the business. The CIT(A) upheld the AO's view that interest income was not eligible for deduction u/s 80IAB but allowed the netting of interest income against interest expenses. The Tribunal concurred with the CIT(A)'s decision on netting, noting the interest income and expenses were inextricably linked to the business.

2. Eligibility of Interest Income for Deduction u/s 80IAB:
The AO denied the deduction u/s 80IAB on the interest income, asserting that it was not derived from the business of SEZ development. The CIT(A) agreed, citing the Supreme Court decision in Liberty India, which emphasized that income must be directly generated from the specific business to qualify for deduction. However, the Tribunal found that the interest income was inextricably linked with the business and eligible for deduction u/s 80IAB, referencing the Gujarat High Court decision in Empire Pumps (P) Ltd. The Tribunal highlighted that the interest income was treated as business income by the Revenue, and thus, the same item of receipt could not be treated differently.

3. Set Off of Share Issue Expenses Against Interest Income:
The Assessee argued that the share issue expenses should be set off against the interest income. The CIT(A) rejected this claim, stating that IPO expenses could not be set off against interest income. The Tribunal did not find it necessary to adjudicate this issue, as the primary ground regarding the eligibility of interest income for deduction u/s 80IAB was decided in favor of the Assessee, rendering the alternate ground academic.

4. Disallowance u/s 14A:
The AO made a disallowance of ?4,19,65,021 u/s 14A, arguing that the Assessee had substantial investments generating exempt income and had claimed interest expenses. The CIT(A) upheld the AO's decision, noting that the Assessee could not provide evidence to counter the AO's findings. The Tribunal, however, found that the disallowance u/s 14A was disproportionately high compared to the exempt income of ?33,01,981. Citing the Delhi High Court decision in Joint Investments (P.) Ltd., the Tribunal directed that the disallowance u/s 14A be restricted to the amount of exempt income earned by the Assessee.

Conclusion:
The Tribunal dismissed the Revenue’s appeal and partly allowed the Assessee’s Cross Objection. The interest income was deemed eligible for deduction u/s 80IAB, and the netting of interest income against interest expenses was upheld. The disallowance u/s 14A was restricted to the amount of exempt income earned by the Assessee.