M/S. PIONEER INDUSTRIES,HARIDWAR vs. ITO, HARIDWAR

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ITA 250/DEL/2015Status: DisposedITAT Delhi02 May 2016AY 2010-113 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the interest income earned on FDRs, which were placed as margin money for bank guarantees and funded by borrowed funds, was intrinsically linked to the business of the eligible undertaking. Therefore, netting off the interest income with interest expenditure was allowed.

What were the facts?

The assessee, a partnership firm, claimed deduction under Section 80IC on interest earned on Fixed Deposit Receipts (FDRs). These FDRs were made with bank as margin money against opening of imported letter of credit and were funded by borrowed money. The Assessing Officer and CIT(A) denied the deduction, holding the interest income was not derived from the industrial undertaking.

What were the issues?

Whether interest earned on FDRs, used as margin money for business purposes and funded by borrowings, is eligible for deduction under Section 80IC and if netting with interest expenditure is permissible.

Which sections of the Income-tax Act were involved?

Section 80IC

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Income Tax Appellate Tribunal, DELHI BENCH “I-2”: NEW DELHI

Before: SHRI I. C. SUDHIR & SHRI PRASHANT MAHARISHI

Hearing: 04/02/2016Pronounced: 02/05/2016

Assessee by : Sh.Pancham Sethi, CA Revenue by: Sh. Subhakant Sahu, Sr. DR Date of Hearing 04/02/2016 Date of pronouncement 02/05/2016 O R D E R PER PRASHANT MAHARISHI, A. M. This appeal filed by the assessee against the order of the ld CIT (A)-I, 1. Dehradun, dated 12.09.2014 for the Assessment Year 2010-11. 2. The assessee has raised the following grounds:- “

The Learned Assessing officer has wrongly disallowed deduction u/s 80IC on interest earned on FOR amounting Rs.3,02,269/-. The Firm has made these FOR with bank as a margin money against opening of imported letter of credit. These FDR's were incidental to and for purpose of carrying on business of the firm and not made for any investment purpose. Further these FDR's were made out of credit facilities availed from Bank and the firm has earned lower interest as compared to interest paid on Bank borrowing, so netting should be done between interest paid and interest received and after netting if there was no interest income, nothing could be reduced from profit & gains of business. Hence addition of claim made by Learned Assessing officer is unwarranted, unjustified and bad in law.”

3. Brief fact of the case is the assessee is partnership firm filed return of income on 13.09.2010 declaring income of Rs.NIL. The assessee is eligible for deduction u/s 80IC of the Income Tax Act. During the year, assessee has earned interest income of Rs. 302269/- on which deduction u/s 80IC was denied holding that this income is not derived from the industrial undertaking. Against this assessee preferred an appeal before the ld CIT (A) who also confirmed the disallowance of deduction u/s 80IC on interest income. Before the ld, CIT (A) assessee also submitted that interest paid by the assessee should be netted off against the interest income. CIT (A) did not Page 2 of 3 agree with the argument of the assessee and did not allow the netting off the interest.

4.

On appeal before us, assessee submitted that interest paid is because of interest on Cash credit limit and term loan as well as for bank guarantee. It was further submitted that interest has been earned on fixed deposit receipts placed with the bank. Assessee further submitted that almost all fixed deposit are placed for obtaining bank guarantee as well as for the purposes of business of the assessee. It was further submitted that most of the funds are deposited in FDR with the borrowed funds. For establishing this fact, assessee has submitted the copy of balance sheet also where assessee has unsecured loan and secured loan-bearing interest. Ld AR further relied on the decision of Gauhati High Court in the case of Panchratna Cement Pvt. Ltd. 317 ITR 259.

5.

Ld DR submitted that as assessee has earned bank interest which is not derived from the industrial undertaking but from the fixed deposits deduction u/s 80IC cannot be allowed on this and further it is also not eligible for netting off.

6.

We have carefully considered the rival contentions. The assessee has claimed that the interest income earned by him on FDRs are linked with the business of the assessee and therefore they should be netted off with interest expenditure incurred by the assessee. Most of the fixed deposit receipts are for the purposes of obtaining bank guarantee for the purposes of the business of the assessee. As Ld. CIT (A) has himself held in para no 8 that Interest earned on FDR placed as margin money for securing letter of credit from bank. The Assessee has placed balance sheet on record which shows that assessee has only borrowed funds such as secured loan, unsecured loan and partners capital which is also a borrowings because interest is allowable as expenditure on this sum it might not have claimed such expenditure during the year. It does not have its own reserve and surplus which does not carry interest. All FDRs have been taken from C C account, used for the bank guarantee purposes as submitted by ld. AR, and not disputed by the Ld DR. Further interest Income on FDR is also taxed by the Ld AO as business income. It is also apparent that assessee does not have any other business other than the business of eligible undertaking. Further CIT (A) has rejected the reliance on all the decided case laws by the Page 3 of 3 assessee holding that those cases pertain to Section 80 HHC of The Income tax Act not on section 80 IA of the act. We have perused provisions allowing the deduction allowable u/s 80 HHC of the act which is as under:

80HHC. 98[(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, 99[a deduction to the extent of profits1, referred to in sub-section (1B),] derived by the assessee from the export of such goods or merchandise :

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