INCOME TAX OFFICER vs. VENKATESHWAR FILAMENTS PVT. LTD.

Facts

The assessee, Venkateshwar Filaments Pvt. Ltd., claimed deduction under Section 80IB of the Income Tax Act for the assessment year(s) not specified. The Assessing Officer rejected this claim, treating net interest income as 'other income'. The CIT (Appeals) upheld the Assessing Officer's decision. The Income Tax Appellate Tribunal (Tribunal), in its order dated 08.09.2005, partly allowed the assessee's appeal, directing the Assessing Officer to compute the deduction under Section 80IB by excluding net interest income from the turnover. The Revenue is aggrieved by this direction and has filed the present Tax Appeals before the High Court.

Held

The High Court held that the issue is no longer res integra in view of the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. vs. CIT. The Supreme Court held that for the purpose of Section 80HHC, only the net interest or net rent, which has been included in the profits of the business of the assessee as computed under the head 'Profits and gains of business or profession', is to be deducted. The Court applied this principle to Section 80IB, stating that ninety percent of not the gross interest but only the net interest included in the profits of the business should be considered. Therefore, the question raised in the appeals was answered in the affirmative, meaning in favour of the assessee and against the revenue. The impugned judgment and order of the Tribunal were confirmed.

Key Issues

1. Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal is right in directing the Assessing Officer to compute deduction under Section 80IB of the Income Tax Act by excluding net interest income in respect of gross interest receipts from the turnover? Assessee's contentions: The judgment does not record specific contentions made by the assessee before the High Court, but it notes that the Tribunal had partly allowed the assessee's appeal. The Tribunal's reasoning, as reflected in the judgment, suggests the assessee argued for the exclusion of net interest income from turnover for 80IB calculation. Revenue's contentions: The Revenue contended that the Tribunal erred in directing the exclusion of net interest income from the turnover for the purpose of computing deduction under Section 80IB. The Revenue's learned advocate was not in a position to dispute the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. vs. CIT.