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2024 (10) TMI 1566 - AT - Income TaxDeduction u/s 80IA - interest income from FDRs can be considered as income derived from the eligible infrastructure business - term derived from has been interpreted in various judicial pronouncements to require a direct and immediate nexus between the income and the business - HELD THAT - In the present case, the FDRs were created as a direct consequence of the loan condition imposed by PNB, which was essential for financing the infrastructure project. The FDRs were not independent investments but were integral to the business s financing structure. The interest income arising from these FDRs was incidental to the core business activity of infrastructure development and thus should be considered as profits derived from the business for the purposes of Section 80IA(4) of the Act. Hon ble Gujarat High Court, in CIT v. Shah Alloys Ltd. 2016 (8) TMI 1191 - GUJARAT HIGH COURT held that interest income earned on FDRs maintained as margin money for securing business loans qualifies as business income when the FDRs are closely linked to the business s financial structure. This principle is squarely applicable to the present case, as the FDRs were created to fulfil the bank s conditions for the loan used to finance the infrastructure project. We note that the reliance on Tuticorin Alkali Chemicals Fertilisers 1997 (7) TMI 4 - SUPREME COURT by AO and the CIT(A) is misplaced. In Tuticorin Alkali Chemicals Fertilisers, the interest income arose from surplus funds that were parked in FDRs, unrelated to the core business activity. Here, the FDRs were created as part of the business financing for the infrastructure project, and the interest income is a direct outcome of the financial requirements of the business. Therefore, the principle laid down in Tuticorin Alkali Chemicals Fertilisers does not apply to the facts of this case. The assessee's audited financial statements, as presented by the AR, clearly confirm that the loan obtained from PNB was exclusively used for the infrastructure project. No unsecured loans or other financial obligations appear on the balance sheet. Thus, the FDRs were solely for the project, further supporting the claim that the interest income earned from the FDRs is part of the business income eligible for deduction. SPV nature of the assessee, and the judicial precedents discussed, the interest income earned from the FDRs, which were created as part of the financing arrangement for the infrastructure project, qualifies as business income derived from the eligible business u/s 80IA(4). AO s disallowance as upheld by the CIT(A) was incorrect. The disallowance is hereby set aside, and the assessee s claim for deduction u/s 80IA(4) of the Act is allowed.
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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