TMI Blog2021 (9) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... o be eligible for deduction u/s. 80IA of the Act. In the present case, the immediate source of interest income was the fixed deposits kept by the assessee with the bank and not the business of the eligible undertaking of the assessee company and the same, in our opinion, is not eligible for deduction u/s. 80IA, as rightly held by the authorities below. Only the net interest income after adjustment of interest paid can be considered for disallowance u/s. 80IA - We note that the claim of the assessee for adjustment of interest can be allowed only when there is inexplicable link between the interest income earned by the assessee and the corresponding interest paid. Since the authorities below have not verified this aspect, we restore this issue to the file of the Assessing Officer for the limited purpose of verifying as to whether there is any inexplicable link between the interest paid and the interest earned by the assessee on bank deposits and recompute the disallowance accordingly on such verification, in accordance with law. Ground No. 1 2 of the assessee's appeal are thus partly allowed. Addition while computing the book profits u/s. 115JB of the Act on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. That on the facts and on the circumstances of the case, and without prejudice to Ground No. 1, above the interest earned of ₹ 3,85,596/-, is liable to be netted off with interest paid and it may kindly be held accordingly. 3. The assessee in the present case is a company engaged in the business of property development. The return of income for the year under consideration was filed by it on 19/09/2011, declaring book profit of ₹ 7,45,54,677/- u/s. 115JB of the Act and total income at 'Nil' under the normal provisions of the Act, after claiming deduction u/s. 80IA of the Act. During the course of assessment proceedings, the claim of the assessee u/s. 80IA of the Act was examined by the Assessing Officer and on such examination, he found that deduction u/s. 80IA was claimed by the assessee even in respect of interest of ₹ 2,29,193/- issued on bank fixed deposits and interest of ₹ 1,56,403/- received on loan given to M/s. Salarpuria Properties Pvt. Ltd. According to the Assessing Officer, the said interest income aggregating to ₹ 3,85,596/- did not constitute the profits of the assessee company derived from the business of operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest income earned from manufacturing activities of the appellant. The interest income on FDRs cannot be said that it derived from manufacturing activity of the appellant. 5.5. The following judicial decisions throw enough light on the issue. 5.5.1 The Honorable Andhra Pradesh High Court in the case of CIT Vs. Raasi Cement Ltd., [232 ITR 554] has answered similar questions involved in favor of the Revenue.. The question before the Honorable High Court was whether the interest earned on surplus funds deposited in the banks during the installation of the company, the status of the company before commencement of the business. The Honorable High Court has held that such interest has to be separately treated as income from other sources and cannot be taken as part of the capital structure following the decision of the Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Vs. CIT - [227 ITR 172] (SC). It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as 'Income from Other Sources' u/s. 57 of the Act. 5.5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 443/112 Taxman 577, where it has been held that interest on fixed deposits received by the assessee was correctly classified by the Assessing Officer as being taxable as income from other sources and that consequently such income could not fall under the head of profits and gains of business or profession. The Division Bench held that as a result such income could not be included in the business profits for the purposes of the formula under section 80HHC. 5.5.5. In Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 the Supreme Court construed the ambit of the expression derived from in section 80HH. The assessee had earned interest on a deposit placed with the Electricity Board for the supply of electricity. The contention of the assessee was that this should be treated as income derived from the industrial undertaking under section 80HH because, without electric supply, the undertaking could not be run. The Supreme Court held that the expression derived from should be understood as something which has direct or immediate nexus with the industrial undertaking. Though electricity may be required for the purposes of the industrial undertaking, the deposit re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the fact that activity was performed to earn the said income in an indirect, incidental or remote manner. The assessee company was engaged in the business of Developing, Maintaining and Operating of Infrastructure Facilities. The Assessing Officer held that in view of the ratio of the decisions and particularly of the Hon'ble Madras High Court decision in the case of Pandian Chemicals Ltd (in which SLP rejected), and of ITAT, Pune Bench in the case of Kirpa Chemicals (P) Ltd. Vs. Deputy Commissioner of Income-tax' (88 ITD 200), the interest income and miscellaneous Income cannot be held to be derived from the business of providing infrastructural facilities as there is no direct nexus between the interest earned and the business of providing infrastructural facilities. The Assessing Officer further observed that income can be said to be derived from an activity if the said activity is immediate and effective source of the said income. Income cannot be said to be derived from an activity merely by reason of the fact that activity was performed to earn the said income in an indirect, incidental or remote manner. Thus, the Assessing Officer held that the interest income ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from fixed deposits reserves kept as security and as a business pre-requisite had nothing to do with carrying on assessee's business of manufacture and sale of electric meters, same would not be entitled to benefit of deduction under section 80-IC. 5.8. Hon'ble ITAT, Delhi in case of Conventional Fastners Vs. ITO in ITA. No. 6016/Del./2017, date of Order: 18/05/2018 for Assessment Year: 2013-2014 held as under:- 10. I have considered the rival submissions. It is not in dispute that assessee earned, interest on FDRs which was deposited with the concerned authorities for taking tender/contracts. Similar issue was considered in earlier year as well as in subsequent years and the authorities below have admittedly denied deduction under section 80IC to the assessee on same set of facts. In A.Y. 2009-2010 the assessee preferred appeal before ITAT, Delhi Bench which was dismissed by the Tribunal vide order dated 25.01.2017 (supra). Copy of the order of the Tribunal is placed on record. In this year also, similar facts have been recorded that the assessee in this year has earned interest income on FDRs which was pledged as performance guarantee in terms of contract awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facility cannot be set off against the interest received on the FDRs pledged by him with the Bank so as to avail any deduction under the head Income from other sources'. Hence, the ground No. 3 on this issue is dismissed. 6. We have heard the arguments of both the sides on this issue and also perused the material available on record. The Ld. Counsel for the assessee mainly raised three contentions in support of the assessee's case on this issue. The first contentions raised by him is that, interest of ₹ 1,56,403/- was actually paid to the assessee company by M/s. Salarpuria Properties Pvt. Ltd. and although this factual position was clearly mentioned by the Assessing Officer on page No. 2 of the assessment order, he considered the same as the interest received by the assessee for the purpose of making disallowance u/s. 80IA(4). In this regard, he has invited our attention to paragraph No. 4.2. of the impugned order of the Ld. CIT(A) wherein this fact was accepted by the Ld. CIT(A) but while deciding the issue related to the disallowance u/s. 80IA, the same was ignored/overlooked by. After taking into consideration, the finding recorded by the Assessing Officer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is any inexplicable link between the interest paid and the interest earned by the assessee on bank deposits and recompute the disallowance accordingly on such verification, in accordance with law. Ground No. 1 2 of the assessee's appeal are thus partly allowed. 9. The next issue raised by the assessee is Ground No. 3 relates to the addition of ₹ 30,93,318/- made while computing the book profits u/s. 115JB of the Act on account of adjustment of depreciation. 10. While computing the book profits of the assessee company u/s. 115JB of the Act, the depreciation of ₹ 6,64,63,511/- as debited in the profit and loss account as per the Companies Act, was added back by the Assessing Officer and the depreciation of ₹ 6,33,73,193/- as calculated under the Income Tax Act, was reduced by him, thereby making an addition of ₹ 30,93,318/- to the book profit. 11. The addition made by the Assessing Officer to the book profit on account of adjustment for depreciation was challenged by the assessee in appeal filed before the Ld. CIT(A) and after considering the submissions made on behalf of the assessee company, this issue was decided by the Ld. CIT(A) vide parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of depreciation for the purpose of computing book profit as per Clause (g) of Explanation 1 u/s. 115JB of the Act and the amount of depreciation debited in the profit and loss account (excluding depreciation on account of revaluation of assets) is required to be reduced. It is noted that this contention was apparently accepted even by the Ld. CIT(A). The Ld. Counsel for the assessee, however, has submitted that the direction give by the Ld. CIT(A) to the Assessing Officer on this issue is little confusing inasmuch as, when the depreciation of ₹ 6,64,63,511/- as worked out under the Companies Act is debited by the assessee company to its profit and loss account, the direction should have been given by the Ld. CIT(A) to verify this aspect alone. He has also invited our attention to the profit and loss account of the assessee company listed at page 43 of the paper book and pointed out that the depreciation of ₹ 6,64,63,511/- as worked out under the Companies Act was actually debited by the assessee company to the profit and loss account. We accordingly modify the direction of the Ld. CIT(A) as given in his impugned order and direct the Assessing Officer to verify the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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