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TMI Blog2012 (8) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... t and thus had direct nexus with the interest paid to bank. 3. Because learned CIT(Appeals) has erred in not properly appreciating that the contention of appellant was not to the effect that interest on FDR was income derived from manufacturing activity and eligible for deduction under section 80IB of the Act, but was to the effect that as interest earned had direct nexus with the interest paid, only net interest, if positive, could have been considered for disallowance of deduction under section 80IB of the Act." 2. The facts of the case relating to these grounds are that in the profit and loss account, the assessee has shown interest on FDR at Rs.9.91. 743/- under the head other income credited in the Profit & Loss A/c. Regarding this interest earned on FDR, it was explained by the assessee during the assessment proceeding that the FDRs were purchased out of company's bank account maintained for the purposes of margin money against letter of credit. All these FDRs were prepared out of CC account of the company with Punjab National Bank. As soon as the payment is realized, the same got credited to CC account along with interest All the FDRs were made for the legitimate ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of any higher Court jumped to the contrary conclusion. The law is fairly settled and there should not be any need to mention any authority to submit that the wisdom of higher court should always be allowed to prevail over better wisdom. Three decisions of different Benches of Hon'ble Tribunal were cited before learned CIT(Appeals) where netting of interest was directed to be allowed. In such situation, holding to the contrary without the support of overruling judgment of higher court defied logic and judicial discipline, Thus, the order dated 25.8.2009 passed by td. CIT(A) for assessment year 2005- 06 cannot be read as precedence to be followed for the year under consideration on the issue. It would be rather apposite to follow the decisions referred therein and allow the claim of the appellant. The ratio decidendi in the cited decisions are extracted in the order of CIT(A), but are being reproduced hereunder for the sake of continuity." 2.3 In support of his argument the Ld, AR has relied on following case laws, which were put before Ld. Predecessor also:- 1. Sanchita Marine Products Ltd, Vs DCIT(2007) 15 SOT 280 2. DCIT Vs Himachal Exicom Communication Ltd. (2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining the letter of credit and other guarantees has to be assessed as business income. 5.5. After relying on the above case laws, the ld. AR has further emphasized that FDRs were made from cash credit account and were also credited therein on maturity and, therefore, there was direct nexus between interest earned and interest paid. To substantiate his claim, he has given, figures from balance sheet of the appellant showing that Rs.22.15 crore was liability towards LC against import on 31.03.2006 & Rs.14.38 crore was on 31.03.2005. Interest paid to the bank on cash credit account amounted to Rs.16,54,907/- as debited in the P & L A/c and on the other hand the interest received on FDR is much lower i.e. Rs.9,91,743/-. On the basis of these facts and figures, the Ld. AR argued that the claim of the appellant for deduction u/s 80IB is well founded and deserves acceptance notwithstanding the contrary findings of the Ld. CIT(A) recorded for AY 05-06 and the reservation expressed by the AO. 5.6 In addition to the above submission, the Ld. AR has also put forward a alternative argument relying on the decision of Hon'ble Delhi Tribunal in case of Himachal Exicom Communication Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this particular income of interest on FDR is derived from the business of industrial undertaking being run by the appellant company or not. All the case laws cited by Ld. AR except in the case of Himachal Exicom Communication Ltd & Sudhir Genset Ltd (Supra), though it has been held that interest income on FDR is to be taxed under the head income from business, none of the case laws have dealt with the issue relating to deduction u/s 80IB and therefore, these case laws are not applicable in the case of the appellant. In case of Himachal Exicom Communication Ltd. ( supra), the Hon'ble Delhi Bench of ITAT has clearly held that interest income cannot be said to have been derived from industrial undertaking and hence not eligible for deduction u/s 801B. Though in case of DCIT Vs. Sudhir Genset Ltd.(supra), it has been held by the Hon'ble Delhi Tribunal that interest derived by the assessee on fixed deposit kept as margin money with bank could only be held as business income and assessee would be entitled to inclusion of the same for the purpose of computing deduction u/s 80IB, it is respectfully submitted that such view may not hold good after the decision of the Hon'ble Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from". Parliament intended to cover sources not beyond the first degree. ………………………………………………………………………………… ………………………………………………………………………………… ………… 15. Continuing our analysis of Sections 80-fIA/80IB it may be mentioned that sub-section (13) of Section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of Section 80-IA, so far as may be applicable to the eligible business under Section 8o-IB. Therefore, at the outset, we stated that one needs to read Sections 80-I, 80-IA and 80-IB as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits u/s 80HH. In section 80HH also only that profit and gains is to be taken which is derived from tile industrial undertaking, Therefore, the AO has rightly followed the ratio of C1T Vs Madras Motor Ltd. / MM Forgings Lid (Supra) while disallowing the deduction u/s 80IB on the interest earned by the appellant on FDR ,Relevant portion of the decision of the Hon'ble Madras High Court in case of CIT Vs Madras Motor Ltd. (supra) is given as under:- "Interest receipts 3.1.1. The interest receipts are also of two descriptions. Firstly, interest received on account of the deposit made by the assesseecompany with the banks for obtaining letters of credit and secondly, interest earned by the assessee-company on the deposit of margin money for letters of credits. 3.1.2 Mrs. Chitra Venkataraman, learned senior standing counsel for the department, very heavily criticised the deduction granted to the assessee company on account of this interest receipts. She points out that the words used in section 80HH are :- "Where tile gross total income of the assessee includes any profits and gains derived from the industrial undertaking………….. to which this sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this contrary stand taken by the High Court, the Apex Court set aside the subsequent contrary judgment. The Apex Court then went on find in para 11 in the following words: "The use of the words' 'derived from' in item 11-AA(2) suggests that the original source of the product has to he found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here. The Apex Court further observed in para 12 as follows : "There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking." As regards the facts of the case concerned, the Apex Court held in that case the nexus was not direct but only incidental. There the Apex Court was considering the case of an assessee who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Board However, it was held by the Division Bench that the interest derived from such deposits could not be said to have been derived from industrial undertaking. The court further held that the immediate and effective source of the interest was the deposit and not the industrial undertaking. Relying upon the number of other decisions, the court observed as follows: ''The word 'derived' is not a term of art and its use in the definition indeed demands an enquiry into the genealogy of the product, but the enquiry should stop as soon as the effective source is discovered and the profit or gain can be said to have been 'derived' from an activity carried on by a person, it the said activity is the immediate and effective source of the said profit or gain .... there must be a direct nexus between the activity and tile earning of the profit or gain and tile income, profit or gain cannot be said to have been derived from any activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner." We agree with this decision, which is binding on us. The aforementioned decision has only been furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these questions cannot be held to be substantial questions of law. So. we decline to entertain these questions." 5.11 Following the decision of Hon'ble Apex Court in case of Liberty India vs. CIT, Madras High Court in the case of CIT vs. Madras Motors and by Punjab and Haryana High Court in case of Nahar Spinning Mills Ltd. vs CIT, I am of the view that no deduction u/s 80IB is allowable on the interest earned on FDR because such interest income is not derived from the business of the industrial undertaking of the appellant because it does not have any direct nexus with the manufacturing activities of the industrial undertaking of the appellant and call be only considered as an incidental income or investment based income as held by tile Apex Court. Taxation of this income under the head "Income From Other Source "or under the head "Income from Business or Profession" would not have any bearing on the computation of deduction u/s 80IB. 5.12 Now, I come to the alternative argument of the appellant that if interest on FDR is taxed separately under the head 'Income from Other Source', income under this head has to be calculated by providing deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Other Sources', which are laid down or expended wholly and exclusively for the purpose of making or earning of such income. In the present case, there is no direct nexus between the fund borrowed by the appellant and investment made in the FDR and therefore, it cannot be said that interest expenditure on the borrowed fund are expended wholly and exclusively for the purpose of earning of interest on FDRs. It has been explained by the Ld. AR that appellant was under the compulsion from the bank to purchase FDR to obtain letter of credit. Such condition might have been put by the bank to ensure safety of recovery in case of any default and, therefore, purchasing of FDR by the appellant may be incidental to its borrowing of fund from the bank but no direct nexus can be established between the borrowing of funds for the purpose of import of material relating to its business of industrial undertaking and purchasing of FDRs. Therefore, no deduction for the interest expenditure on borrowed fund debited by the appellant in P &. L A/c can be provided from its interest income on FDRS. Interest income on FDR is incidental to its business for which the appellant company has not incurred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DR relied upon the orders of the authorities below and submitted that all the grounds are covered by order of ITAT, Agra Bench in the case of same assessee for preceding assessment year 2005-06 and there is no change in the facts and circumstances. Therefore, the appeal of the assessee may be dismissed. The ld. DR submitted that the decision of Hon'ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) is distinguishable on facts because in the case of the assessee interest on FDRs was treated as income from other sources, which cannot be given set off or netting against the business expenditure under a different head. 5. We have considered the rival submissions and the material on record. The authorities below have specifically noted in the impugned order that after considering the nature of the issue, it was found that in the similar facts and circumstances, the claim of the assessee u/s. 80IB on interest on FDR was disallowed in preceding assessment year 2005-06. It was also noted that no new facts have been brought on record in the assessment year under appeal as compared to the earlier year. Even before us, the ld. counsel for the assessee did not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Pandian Chemicals Ltd. vs. CIT reported in 262 ITR 278 (SC). The Hon'ble Supreme Court of India has also adjudicated and decided the issue in dispute against the assessee. 10. Apart from the aforesaid decisions rendered by the Hon'ble Supreme Court of India as well as Hon'ble High Courts, now latest decision rendered by the Hon'ble Supreme Court of India in the case of Liberty India vs. CIT, 317 ITR 218 (SC) has also adjudicated the issue in dispute and decided the same against the assessee. 11. In view of the aforesaid discussions, we are of the considered opinion that the issue in dispute has already been adjudicated by the Apex Court and decided against the assessee and the ld. First Appellate Authority has also decided the issue in dispute against the assessee by respectfully following the same. Therefore, no interference is called for on the issue in dispute and hence we hold that interest income on FDRs. from Bank for procuring letter of credit by the assessee is not eligible for deduction under section 80IB of the Act. The citations cited by the ld. Counsel for the assessee are very old, but keeping in view the latest decision rendered by the Hon'ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also in preceding assessment year 2005-06 rejected the alternate claim of assessee for netting of interest, which was interest on FDR, has been treated as income from other sources whereas the interest debited to profit and loss account constitutes business expenditure. The assessee itself in the books of account and profit and loss account etc., as noted above, showed the same income under the head "other income" (PB-17). The netting of income under one head of income against expenditure under the different head of income was not found possible as per law. The finding of fact recorded by the ld. CIT(A) has been approved by the Tribunal and the order of the Tribunal has become final because no appeal is preferred against this order before the Hon'ble High Court. Therefore, there is no change in the facts and circumstances of the case and as such, claim of netting cannot be allowed in favour of the assessee. In the case of ACG Associated Capsules (P) Ltd. (supra) the issue was with regard to deduction u/s. 80HHC read with Explanation. Therefore, the ld. DR rightly contended that the facts are clearly distinguishable in this case from the facts of the case of the present assessee. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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