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2018 (2) TMI 1152 - AT - Income TaxAddition of interest income - whether interest on FDs cannot be taxed in the hands of the assessee u/s.56? - Held that - The interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT(A) and dismiss the ground of appeal taken by the revenue for both the assessment years. Addition of expenses u/s.14A - Held that - There is no claim and the Assessing Officer by applying the provisions of section 14A r.w.Rule 8D has made the addition. Looking to the facts of the case in its entirety, we are of the opinion that when the assessee has not claimed any expenditure in its return of income either under the head business income or other sources , the reduction of expenses has no base or legal scrutiny. Therefore the provisions of section 14A are not applicable in this case and, we allow the cross objections of the assessee and delete the addition in both the assessment years under consideration. - Decided in favour of assessee.
Issues Involved:
1. Taxability of interest income on fixed deposits under Section 56 of the Income Tax Act. 2. Applicability of Section 14A of the Income Tax Act concerning the reduction of expenses. Detailed Analysis: 1. Taxability of Interest Income on Fixed Deposits: The primary issue in both appeals by the revenue was whether the interest income on fixed deposits (FDs) should be taxed under Section 56 of the Income Tax Act. The Assessing Officer (AO) had taxed the interest income of ?1,73,30,736 for the assessment year 2010-2011 and ?13,64,57,044 for the assessment year 2012-13, arguing that the interest earned on FDs should be categorized as "income from other sources." The AO referenced the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, 227 ITR 172 (SC), to support this stance. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions, holding that the interest income on FDs was capital receipts and not taxable. The CIT(A) relied on the Tribunal's decision in the assessee's own case for the assessment year 2008-09 and the CIT(A)-II's decision for the assessment year 2009-2010. The Tribunal reviewed the case and upheld the CIT(A)'s decision. The Tribunal cited its previous ruling, which distinguished the facts from the Tuticorin Alkali case, noting that the interest income was inextricably linked to the setting up of the project, thus qualifying as capital receipts. The Tribunal emphasized that the income derived from parking funds temporarily in banks did not change the character of the funds, and such interest should not be taxed under "income from other sources." 2. Applicability of Section 14A Concerning Reduction of Expenses: The assessee's cross objections contested the AO's reduction of expenses amounting to ?7,12,500 under Section 14A for both assessment years. The AO had applied Rule 8D to calculate the disallowance, despite the assessee not claiming any expenses in the return of income. The Tribunal found that Rule 8D is applicable prospectively from the assessment year 2008-09. The Tribunal reviewed the audited accounts and income tax returns, noting that the assessee had capitalized the expenditure under pre-operative expenses and had not claimed any expenses under "business income" or "other sources." Consequently, the Tribunal concluded that the provisions of Section 14A were not applicable, as there was no base or legal scrutiny for the reduction of expenses. Conclusion: The Tribunal dismissed the revenue's appeals and allowed the assessee's cross objections. The interest income on FDs was held to be capital receipts and not taxable under "income from other sources." Additionally, the reduction of expenses under Section 14A was deemed inapplicable due to the non-claim of expenses by the assessee. The judgment was pronounced on 15/02/2018.
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