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TMI Blog2017 (11) TMI 1293X X X X Extracts X X X X X X X X Extracts X X X X ..... : - * That there is no direct nexus between the borrowed funds and the purchase of fixed deposits. * That the interest income of Rs. 14,74,992/- cannot be allowed as deduction u/s 80IB of Income Tax Act, 1961. * That the interest income is not derived from the industrial undertaking. * That assessment order framed by Ld. AO is erroneous and prejudicial to the interest of revenue. * That the assessment is set aside to the file of assessing officer with the direction to re-compute the income. 3. That having regard to facts & circumstances of the case, Ld. CIT has erred in law as no adequate opportunity of hearing was granted and in framing the impugned the submission of the assessee and further erred in holding that assessment was erroneous and prejudicial to the interest of revenue. 4. That having regard to facts & circumstances of the case, Ld. CIT has erred in law and on facts in passing the impugned order u/s 263 which is not sustainable on various legal and factual grounds. 5. That the appellant craves the leave to add, amend, modify, delete any of the grounds of appeal before or at the time of hearing and all the above grounds are and on facts in passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of deduction the assessee submitted that the borrowed funds had been utilised for purchasing the fixed deposits and therefore the interest paid by the assessee should be set off against the interest earned on FDR. The Ld. CIT noted that the assessee failed to establish direct nexus between the borrowed funds and the purchase of fixed deposits. 2.4 According to the Ld. CIT, the deduction under section 80IB on the interest income was not allowable because the interest on fixed deposit was not derived from the industrial undertaking and there was no direct nexus between the interest income and the industrial activity carried out by the assessee. He placed reliance on following judgments: (i) In the case of India Leather Corporation P. Ltd. Vs CIT(SC) 227 ITR 552 it has been held that "The phrase "derived from" is different from "Attributable to" - It is no doubt true that the words 'attributable to' have a wider meaning than the words 'derived from' - But at the same time it cannot be ignored that normally the word 'attribute' implies that 'for a result to be attributable to anything' it must be wholly, or in material part, caused by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on received from sundry debtors for delayed payments and profit from sale of imported material as such income is not derived from the eligible undertaking." 2.5 In view of the above finding, he set aside the assessment with the direction to re-compute the income as directed by him. 2.6 Aggrieved, the assessee is in appeal before the Tribunal challenging the direction of the Ld. CIT. 3. Before us, the Ld. counsel filed two paper books containing pages 1 to 145 and 1 to 22 respectively. He also filed a supplementary paper book containing pages 1 to 38. 4. The Ld. counsel referred to page 32 and 33 of the supplementary paper book and submitted that the interest of Rs. 14,05,554/- during the year was earned on fixed deposits of Rs. 91,15,000/-. He submitted that said fixed deposits were made out of the funds borrowed in financial year 2005-06 and the interest of Rs. 59,06,522/- was paid during the year towards such funds borrowed. 4.1 The Ld. counsel referred to pages 1 to 4 of the paper book containing 22 pages and submitted that issue in dispute of nexus between the borrowed money and money utilized for the purpose of earning interest income is covered in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the query letter issued also the Assessing Officer has not made any enquiry in respect of the allowability of deduction on interest income. According to him, it is a case of no enquiry on the issue of allowability of deduction under section 80IB on interest by the Assessing Officer, and therefore , the decisions of the Hon'ble Delhi High Court relied upon by the assessee, were not applicable in the facts of the case. 4.5 He further submitted that the Ld. CIT has held the order of the Assessing Officer erroneous mainly on the ground that the other income including interest income was not derived from the business of manufacturing of eligible product and there was no direct nexus between the interest income and the industrial activity carried out by the assessee. He further submitted that the Tribunal in subsequent assessment year, 2010-11 has also upheld the disallowance of deduction under section 80IB of the Act in respect of interest income from fixed deposits. 4.6 He submitted that in assessment year 2010-11, the Tribunal restored the matter to the Assessing Officer only for verifying netting of interest paid against interest income i.e. nexus of borrowed money and money util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal except general ground No. 5, are connected with the issue of proceedings u/s. 263 of the Act and thus, were heard together. In the facts of the case, following issues arises for our consideration in the grounds raised: 1. Whether any enquiry was conducted by the Assessing Officer on the issue of allowability of deduction in respect of interest income earned on fixed deposits in assessment proceedings? 2. Whether the Assessing Officer committed any error in the assessment completed ? 6. As regard the first issue, the learned counsel has relied on the decision of the Commissioner of Income-tax Vs. Sunil Kumar Sharma (supra) and CIT Vs. Sunbeam Auto Ltd. (supra). The Hon'ble High Court in the cases has held that there is a distinction between "lack of enquiry" and "inadequate inquiry" and if there was any enquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. The Ld. counsel submitted that the instant case is also of the case of "inadequate Inquiry" by the Assessing Officer. The Ld. counsel referred to the assessment order and submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by the Assessing Officer. No other query letter raising query related to allowability of deduction under section 80IB of the Act on interest income, has been produced before us by the Ld. counsel of the assessee. 6.3 The Ld. counsel referred to page 34 to 38 of the supplementary paper book and submitted that assessee has given detailed explanation in respect of allowability of deduction on interest income in the proceeding under section 154 of the Act. We have perused the said rectification proceeding under section 154 of the Act. We find that these rectification proceedings were initiated on 28/03/2013, whereas the assessment order in question was passed by the Assessing Officer on 30/12/2011. In our opinion, raising enquiry relating to deduction on interest income in proceedings under section 154 of the Act subsequent to the completion of the assessment proceedings is not relevant as far as proceeding under section 263 of the Act is concerned. 6.4 In such circumstances, we hold that no enquiry has been made by the Assessing Officer on the issue in dispute and it is not a case of inadequate Inquiry by the Assessing Officer. Thus, the cases relied upon by the assessee are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal, the Assessing Officer has allowed netting of interest paid against the interest income. According to him, in the year under consideration the interest paid being more than the interest earned, no disallowance under section 80IB could have been made on interest income. 7.3 In our opinion, the disallowability of deduction on interest income from fixed deposit and netting of interest paid against interest earned are two different issues altogether. The netting of interest can only be allowed, if the interest-bearing borrowed money has been utilized for investment in interest earning fixed deposits. And, if in the process of netting, if there is net interest income, then allowability of deduction on said income under section 80IB of the Act comes into picture. We find that during proceedings under 263 of the Act before the Ld. CIT, the assessee failed to establish a direct nexus between the borrowed funds and the purchase of fixed deposits and thus, he disallowed the interest income as deduction under section 80IB of the Act. For disallowing the said deduction, he recorded that interest on fixed deposit was not derived from the industrial undertaking and therefore, there was no n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here, as a result of the computation of profits and gains of business and profession, the Assessing Officer 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." 6. From the above, it is evident that while computing the eligible profit of the business (in the case of industrial undertaking), only net interest is to be excluded but not the gross interest. Net interest would be gross interest reduced by expenditure incurred for earning such interest. Therefore, there has to be nexus between the payment of interest and earning of interest. We find that learned CIT(A) only compared between the interest received and interest payment. He has not at all considered whether there was any nexus between the borrowed money an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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