2014 (7) TMI 676 - AT - Income Tax

Deduction u/s 80IB of the Act Income from other sources - Interest earned on FDRs not derived from eligible undertaking Held that - The decision in CIT Vs. Shri Ram Honda Power Equip 2007 (1) TMI 86 - HIGH COURT, DELHI - in deducting such interest, the AO will take into account the net interest, i.e., gross interest as reduced by expenditure incurred for earning such interest, (ix) Where, as a result of the computation of profits and gains of business and profession, the AO treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest - The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle - there has to be nexus between the payment of interest and earning of interest - CIT(A) only compared between the interest received and interest payment thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO to examine the nexus between the borrowed money and money utilized for the purpose of earning interest income Decided in favour of Revenue.

Summary

Issues:
1. Whether the deletion of addition made by the AO on the disallowance of deduction u/s 80-IB of the IT Act, 1961 on interest earned on FDRs is correct.
2. Whether the interest paid by the assessee in the course of business can be set off with the interest earned on FDRs taxable under income from other sources.

Analysis:
1. The appeal pertains to the Revenue against the CIT(A)'s order for AY 2010-11. The AO reduced the deduction claimed by the assessee under Section 80IB by the interest income of Rs. 16,84,239 credited to the profit & loss account. However, the CIT(A) deleted the addition stating that the interest paid exceeded the interest received, resulting in a loss under the head 'interest', which is an allowable expenditure. The CIT(A) found no justification for the AO's addition and ruled in favor of the assessee.

2. The issue of whether interest income is eligible for deduction under Section 80IB was settled in favor of the Revenue by the Apex Court in the case of Pandian Chemicals Ltd. The Court emphasized that the interest must have a direct nexus with the industrial undertaking to be considered for special deduction under Section 80HH. The Hon'ble Jurisdictional High Court in CIT Vs. Shri Ram Honda Power Equip clarified that only net interest, not gross interest, should be excluded while computing eligible profit of the industrial undertaking. The net interest is the gross interest reduced by expenditure incurred for earning such interest, highlighting the necessity of a nexus between interest payment and earning.

3. The Tribunal concluded that the CIT(A) failed to consider the nexus between borrowed money and money used to earn interest income. It was emphasized that only net interest should be excluded from eligible profit, requiring a clear connection between interest payment and interest earning. The matter was remanded to the AO to re-examine the nexus and compute net interest as per the High Court's decision in Shri Ram Honda Power Equip. The AO was directed to provide the assessee with a fair opportunity to present their case.

4. In conclusion, the Tribunal allowed the Revenue's appeal for statistical purposes, highlighting the importance of establishing a direct link between interest payment and interest income to determine the net interest for exclusion from eligible profit. The decision was pronounced in open court on 13th June 2014.