2019 (6) TMI 534 - AT - Income Tax

Deduction u/s 80IB denied - treating the interest income on LC, FD and bank guarantee, interest on VAT, refund and interest on HDFC asset management as income from other sources - HELD THAT - Assessee being in the business of manufacturing of aluminum ingots has availed various credit facilities in the form of cash credit, buyer credit, LC, bank guarantee etc. from State Bank of India for which it has to keep the necessary deposits as securities as per the bank mandate and the assessee has earned interest income as has been stated hereinabove. CIT(A) in A.Y. 2010-11 has decided the issue in favour of the assessee by following the decision of CIT vs. Koshika Telecom Ltd. 2006 (2) TMI 140 - DELHI HIGH COURT wherein it has been held that interest flowing from deposits made by the assessee which are in extricably linked to the business of the assessee can not be treated as income from other sources. In the case of CIT vs. Jaypee Dsc Ventures Ltd. 2011 (3) TMI 309 - DELHI HIGH COURT it has been held that where the money is deposited into bank not as surplus money but out of business exigencies and necessities, then the interest acquires the character of business receipts. In the case of CIT vs. Indo Swiss Jewels Ltd. 2005 (9) TMI 47 - BOMBAY HIGH COURT the interest earned on short term deposits kept apart for the purpose of business has to be treated as income earned from business and can not be treated as income from other sources. Similarly, in the case of CIT vs. Koshika Telecom 2005 (9) TMI 47 - BOMBAY HIGH COURT which has been relied upon by the predecessor CIT(A) to decide the appeal in favour of the assessee in A.Y. 2010-11 has the same ratio. Accordingly, we respectfully following the decisions as discussed hereinabove direct the AO to treat the interest and the various deposits as stated hereinabove as income from business and not from income from other sources. Accordingly, the assessee is entitled to deduction under section 80IB. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of interest income as business income or income from other sources for deduction under section 80IB of the Income Tax Act.

Analysis:
1. The primary issue in this case pertains to the treatment of interest income by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) regarding its classification as business income or income from other sources for the purpose of claiming deduction under section 80IB of the Income Tax Act. The AO contended that the interest income on LC, FD, bank guarantee, VAT refund, and HDFC asset management does not directly relate to the business activities of the assessee and hence should be considered as income from other sources. This decision was based on precedents such as Murli Investment Co. vs. CIT and Godavari Sugar Mills Ltd. vs. CIT among others. Consequently, the AO denied the deduction under section 80IB in the assessment order dated 13.02.2015.

2. The CIT(A) upheld the AO's decision, emphasizing that the interest income should have a direct nexus with the manufacturing activities of the industrial undertaking to be eligible for deduction under section 80IB. The CIT(A) referred to judicial precedents like Cambay Electric Industrial Co. Ltd. v. CIT and Pandian Chemicals Ltd. v. CIT to support the argument that interest income without a direct link to manufacturing activities cannot be considered for the deduction. The CIT(A) dismissed the appeal of the assessee on this ground.

3. In the appellate proceedings before the Appellate Tribunal, the assessee argued that the fixed deposits were essential for obtaining credit facilities related to the business activities, thereby establishing a direct relationship between the interest income and the business. The assessee presented various decisions, including CIT vs. Jaypee Dsc Ventures Ltd., CIT vs. Indo Swiss Jewels Ltd., and others, to support the claim that interest income from deposits related to business exigencies should be treated as business income.

4. After considering the arguments from both parties and reviewing the case details, the Appellate Tribunal observed that the interest income in question was directly linked to the business operations of manufacturing aluminum ingots. The Tribunal referred to past judgments like CIT vs. Jaypee Dsc Ventures Ltd. and CIT vs. Indo Swiss Jewels Ltd. to establish that interest income from deposits made for business purposes should be classified as business income and not income from other sources. Consequently, the Tribunal directed the AO to treat the interest income and related deposits as income from business, allowing the assessee to claim deduction under section 80IB.

5. Ultimately, the appeal of the assessee was allowed by the Appellate Tribunal, overturning the decisions of the lower authorities and granting the deduction under section 80IB based on the direct nexus between the interest income and the business activities of the assessee.

This detailed analysis highlights the key legal arguments, precedents, and decisions involved in the judgment regarding the treatment of interest income for deduction under section 80IB of the Income Tax Act.