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TMI Blog2013 (9) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 pertains to taxing interest income earned during the construction period as income from other sources. The assessee has undertaken various projects for expansion of its existing business. For this purpose the assessee has availed loans from banks and other borrowings in the form of Foreign Currency Convertible Bonds (FCCBs). The interest on these borrowings had been capitalised towards cost of project under EDCP account (Expenditure during construction period). After the loans/ borrowings were availed, the funds were kept in fixed deposit account in the bank for short period of time till they were to be utilized. The interest income therefrom was adjusted against the interest expenses which were to be capitalized, as there was a direct nexus between the income and expenses. Interest was also earned on FD's kept as margin money with banks to avail guarantees, etc. Breakup of interest income which was capitalised under EDCP account is as under: - Source of Funds Nature of fixed deposits Interest income Loan from Banks Temporary, out of funds not required immediately 8.98 Loan from Banks Out of funds kept as margin money 5.52 Proceeds from FCCB's Temporary, out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so that only net amount can be brought to tax as income. 5. The learned D.R., however, in reply, relied on the principles laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.(supra) and also in the case South India Shipping Corporation Ltd. relied upon by the learned CIT(A). He then referred to the facts as taken by the AO in the order. 6. We have examined the issue. There is no dispute with reference to assessee earning interest income but adjusting the same towards cost of project. The issue of having direct nexus with the borrowings has not been examined by the AO at all. In case the assessee has utilised the borrowed funds for earning the income to that extent, the interest has to be given set off to the interest paid on the borrowed funds. It was the contentions of the assessee that there is a direct nexus and these funds are not surplus funds so as to consider as income from other sources. This aspect requires examination by the AO and in case there is direct nexus with the earning of interest income with that of the borrowals, then only net interest can be brought to tax or adjusted in the construction account. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned assessment year as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 238 ITR 81 and a reasonable amount can be disallowed. On the facts, it was submitted that the assessee has made investments in earlier years wherein there is no such disallowance and the only investment made in the year of Rs. 17 crores was in bonds earning taxable income, therefore, no disallowance of interest is required on facts. 9. The learned D.R., however, relied on the orders passed by the authorities. 10. Keeping in view the principles laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we are of the opinion that Rule 8D is not applicable to this assessment year. Since the assessee's activities are inter-related, one cannot rule out certain expenditure being incurred on earning exempt income. Keeping in view the Coordinate Bench decisions in the case of M/s. Darashaw & Company P. Ltd. in ITA No. 225/Mum/2011 dated 12th June, 2013 and Vikabh Securities P. Ltd. in ITA No. 459/Mum/2011 dated 31st January, 2013, we consider an amount of 5% of the dividend earned, i.e. Rs. 7,83,850/- can be considered as expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction is not allowable as bad debt the same can be allowed as business loss under section 28 of the Act if the same is incidental to carrying on the business. With reference to other amounts it is submitted that these are deposits made for the purpose of taking flats on Leave and Licence basis (Rs.1,50,000/-), advance given to employees which could not be recovered (Rs.43,362/-) and an amount of Rs. 7,58,221/- towards TDS payment of interest to bank. 12. The learned D.R., however, relied on the orders of the AO to submit that these amounts do not satisfy the principles laid down under section 36(2). There were not details on record to allow it as business loss and the liability has to be examined. 13. We have considered the issue. As far as the AO is concerned, he disallowed the amount on the reason that no details were furnished. The learned CIT(A) also did not examine the claim in its correct perspective and even the alternative claim was also not considered. The amounts satisfy the conditions of section 36(2) as these are taken into the books of account. These advances/ receivables are part of the business activity of the assessee and there is no dispute with reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited to the P & L Account. It was submitted that the subsidy was not reimbursement of cost incurred by the assessee. Ld.Counsel has placed reliance upon the decision of the Mumbai ITAT in the case of Total Packaging Services in ITA No. 5364/Mum/2009 and the Diamonds Tool Industries in ITA No. 2080/Mum/2011 following the decision of the Hon'ble Gauhati High Court in the case of CIT vs. Mehalaya Steels Ltd. 55 DTR 27. He also relied upon the Coordinate Bench decision in the case of Jyoti Ceramic Industries P. Ltd. in ITA No. 7080/Mum/1998 wherein it was held that reimbursement of cost by way of grant/subsidy is eligible for deduction under section 80I and the same goes to reduce the interest expenditure incurred. 16. The learned D.R., however, relied on the decision of the Hon'ble High Court in the case of Liberty India to submit that the word used in 80IB is "derived' therefore, there should be primary source of income and government incentives cannot be an eligible profit. 17. We have considered the issue and examined the facts as placed on record. There is no dispute with reference to the claim and the amount of reimbursement to the assessee. It was stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the AO for examination. 19. Ground No. 16 pertain to disallowance under section 40(a)(ia) for short deduction of tax. It was submitted that the AO disallowed an amount of Rs,.6,82,852/- on account of short deduction under section 40(a)(ia) and the same was not contested before the CIT(A). It was submitted that recently, in the case of DICT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Mum) the ITAT held that the provisions of section 40(a)(ia) do not apply to the case of lesser deduction of tax, which was followed in the case of Hindustan Unilever India Ltd. 22 ITR (Trib) 737. It was the submission that since the disallowance is only on account of short deduction the same should be deleted. This is a legal issue, hence the ground is admitted. But since the same was not raised before the AO, we restore the issue to the file of the AO for fresh consideration. 20. Ground No. 17 raised by the assessee is an additional ground pertaining to disallowance of prior period expenses which as subject matter of the Revenue appeal in ITA No. 6226/Mum/2010. The assessee is a listed public company. It was submitted that the accounts the assessee are finalised within few days of the year end an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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