2012 (7) TMI 38 - AT - Income Tax

Treatment of interest income business income or income from other sources - deduction u/s 80IB of the Act Held that - FDRs were made out of borrowed funds, there is a direct nexus between the borrowings and the interest generation. This being so and keeping in view the provisions of section 57(iii) of the Act which provides that in computing the income under the head income from other sources any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income, we are of the view that the assessee is entitled to the deduction of interest paid on borrowed funds Assessee partly allowed Addition made by the AO u/s 145A of the Act - AO observed that as per the provisions of section l45A, all the taxes and duties paid are to be included for the purpose of valuation u/s 145A Held that - Assessee is following consistent method of accounting and there is no change in accounting system followed by the assessee in the year under consideration - CIT(A) was fully justified in deleting the addition made by the AO u/s 145A of the Act In favor of assessee

Issues Involved:
1. Treatment of interest income as income from other sources.
2. Deduction under section 80IB of the Income Tax Act.
3. Addition under section 145A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income as Income from Other Sources:
The primary issue was whether the interest income of Rs.4,08,096/- (for AY 2005-06) and Rs.4,30,717/- (for AY 2006-07) should be treated as income from other sources or business income. The Assessing Officer (AO) noted that the interest was earned on margin money and bank guarantees, which were not part of the business activities but resulted from keeping money in the bank. The AO concluded that such interest income should be classified as income from other sources. The assessee contended that the interest income was inextricably linked with the industrial undertaking. However, the AO and the CIT(A) upheld the treatment of interest income as income from other sources.

Upon appeal, the Tribunal considered the assessee's argument that the interest on borrowed funds should be reduced from the interest income while determining the income from other sources. The Tribunal found that since the Fixed Deposit Receipts (FDRs) were made out of borrowed funds, there was a direct nexus between the borrowings and the interest generation. Consequently, under section 57(iii) of the Act, the assessee was entitled to a deduction of interest paid on borrowed funds, and the AO was directed to allow the same. The grounds taken by the assessee were partly allowed.

2. Deduction under Section 80IB of the Income Tax Act:
The assessee argued for the deduction under section 80IB concerning the interest income. However, the Tribunal noted that the interest income from deposits is not eligible for deduction under section 80IB, as supported by the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Dresser Rand India (P.) Ltd. (2011). Consequently, the Tribunal upheld the AO's and CIT(A)'s decision to deny the deduction under section 80IB for the interest income.

3. Addition under Section 145A of the Income Tax Act:
For AY 2005-06, the AO made an addition of Rs.11,08,904/- under section 145A, considering the inclusion of excise duty/VAT on sales, closing stock, purchases, and opening stock. The AO added the amount to the profits of the business, which was contested by the assessee. The CIT(A) deleted the addition, following the Tribunal's decision in Hawkins Cookers Ltd. and the Hon'ble Bombay High Court's decision in CIT vs. Kolsite Maschine Fabrik Ltd.

For AY 2006-07, a similar addition of Rs.88,45,996/- was made by the AO under section 145A. The CIT(A) again deleted the addition, and the Tribunal upheld this decision, noting that the assessee consistently followed the same accounting method without any change. The Tribunal observed that the AO had allowed the deduction under section 43B after verifying the evidence provided by the assessee.

The Tribunal, while considering the similar facts and issues for both assessment years, upheld the CIT(A)'s decisions and rejected the grounds taken by the Revenue. The assessee's appeals were partly allowed, and the Revenue's appeals were dismissed.

Conclusion:
The Tribunal provided a detailed analysis and upheld the treatment of interest income as income from other sources while allowing the deduction of interest paid on borrowed funds. The Tribunal also supported the deletion of additions made under section 145A, emphasizing the consistent accounting method followed by the assessee and the provisions of section 43B. The decisions were based on established precedents and the specific facts of the case.

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