2024 (11) TMI 1161 - AT - Income Tax

Disallowance of deduction u/s 80IC on interest - interest earned on this share capital was treated as income - HELD THAT - Interest so earned was used for capital expenses as mandated by the Ministry of Ayush, New Delhi and whole of the interest earned was later on converted as Share Capital Contribution of the Central Government as per letter dated 18.01.2016 issued by the Ministry of Ayush, Government of India, New Delhi. The interest on time deposits was treated as share capital infusion and that permission to issue share against interest was accorded by the Ministry. Assessee had made fixed deposit and earned interest which belonged to Central Government of India and was utilized as capital receipt with the prior approval of the Central Government. So, it is a glaring fact that the Central Government of India had an overriding title over the interest on FDR made from capital. Therefore, the interest earned on FDR was not part of income of the appellant. CIT(A) has relied on interest having been shown by assessee as income from other sources. As per ratio of judgment in Kedarnath Jute Mfg Co. Ltd Vs Commissioner of Income Tax (Central), Calcutta s case 1971 (8) TMI 10 - SUPREME COURT it is well settled that the entries made in books of accounts are not relevant for computing total income. CIT(A) relied on ratio of judgment CIT vs Pandian Chemicals Limited s case 1997 (4) TMI 38 - MADRAS HIGH COURT relating to interest earned on own free deposits by the company which was not in the present case. Therefore reliance on judgment in Commissioner of Income Tax vs Pandian Chemicals Limited 1997 (4) TMI 38 - MADRAS HIGH COURT was not proper. In view of above material facts and well settled principles of law the impugned orders are not sustainable and are set aside. Appeal filed by the assessee is allowed.

Summary

Issues:
Challenge of disallowance of deduction under Section 80IC on interest earned on fixed deposits.

Analysis:

1. The appellant, a Central Public Sector Enterprise, received a share capital infusion for renovation and modernization of its manufacturing unit. The interest earned on this share capital was treated as income. The appellant filed its return, declaring the interest income and claimed a deduction under Section 80IC. The assessing officer disallowed the interest income and made additions to the assessed income.

2. The appellant appealed to the Commissioner of Income Tax (Appeals) who upheld the disallowance of interest income. The appellant then challenged this decision in the present appeal.

3. The appellant contended that the interest earned on fixed deposits, which was part of the share capital contribution from the Central Government, should not be considered as income. The appellant argued that the interest earned was to be used as directed by the Central Government and was a capital receipt, not revenue receipt.

4. The Department of Revenue argued that the interest earned on fixed deposits was utilized for capital expenses as mandated by the Ministry of Ayush, and the entire interest was converted into share capital contribution with the approval of the Central Government. The Department claimed that the interest belonged to the Central Government and was not part of the appellant's income.

5. The Tribunal analyzed the facts and legal principles. It noted that the interest earned on fixed deposits was treated as share capital infusion and was used for capital expenses with the approval of the Central Government. The Tribunal found that the Central Government had an overriding title over the interest earned on fixed deposits, indicating it was not part of the appellant's income.

6. The Tribunal referred to the judgments in Kedarnath Jute Mfg Co. Ltd Vs Commissioner of Income Tax and CIT vs Pandian Chemicals Limited. It emphasized that entries in the books of accounts are not conclusive for computing total income. The Tribunal concluded that the interest earned on fixed deposits, being part of the share capital contribution from the Central Government, was not income of the appellant.

7. Considering the arguments and evidence presented, the Tribunal allowed the appeal filed by the assessee, setting aside the impugned orders and ruling in favor of the appellant.

8. The judgment was pronounced in open court on 22nd November 2024.

This analysis highlights the key issues, arguments, and the Tribunal's decision regarding the disallowance of deduction under Section 80IC on interest earned on fixed deposits by a Central Public Sector Enterprise.