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2024 (10) TMI 1566 - AT - Income Tax


Issues:
1. Disallowance of deduction under Section 80-IA(4) of the Income Tax Act for interest income from Fixed Deposits (FDRs) maintained with a bank.

Analysis:
The appeal before the Appellate Tribunal ITAT Ahmedabad arose from the disallowance of a deduction claimed by the assessee under Section 80-IA(4) of the Income Tax Act for the Assessment Year 2016-17. The assessee, a Special Purpose Vehicle (SPV) engaged in infrastructure development projects under the BOT model, filed a return of income claiming a deduction of Rs. 20,93,513/- under Section 80-IA(4) of the Act. The dispute centered around the interest income of Rs. 27,83,063/- earned from FDRs maintained with Punjab National Bank (PNB), which were held as part of the Debt Service Reserve Account (DSRA) required by the bank for the infrastructure project. The Assessing Officer (AO) disallowed the deduction, classifying the interest income as "income from other sources" under Section 56 of the Act, citing the lack of direct nexus with the infrastructure business activities. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the disallowance, relying on the precedent set by the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. The key question was whether the interest income from FDRs could be considered as "profits derived from" the infrastructure business for the purpose of claiming the deduction under Section 80-IA(4) of the Act.

The Appellate Tribunal heard arguments from both sides. The assessee contended that the FDRs were created as a business necessity to comply with the loan terms set by PNB for financing the infrastructure project. The FDRs were integral to securing the loan and were directly linked to the project's financial structure. The Departmental Representative (DR) argued that the loan purpose was not exclusively for the infrastructure project, including repayment of unsecured loans. However, the assessee demonstrated through audited financial statements that the loan was solely utilized for the infrastructure project, with no evidence of other business activities or liabilities. The Tribunal noted that the SPV nature of the assessee, exclusively formed for the infrastructure project, indicated a direct connection between the FDRs and the business operations.

The Tribunal analyzed relevant judicial precedents, including the decision of the Gujarat High Court in CIT v. Shah Alloys Ltd., which recognized interest income on FDRs maintained as margin money for business loans as qualifying for business income. The Tribunal distinguished the present case from Tuticorin Alkali Chemicals, emphasizing that the FDRs were not surplus investments but essential for the infrastructure project's financing. The Tribunal concluded that the interest income from the FDRs, created as part of the project's financial arrangement, constituted business income derived from the eligible business under Section 80-IA(4) of the Act. Consequently, the disallowance of the deduction was set aside, and the assessee's claim under Section 80-IA(4) was allowed.

 

 

 

 

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