2013 (5) TMI 922 - AT - Income Tax

Tribunal Rules: Fixed Deposit Interest as 'Other Sources,' SEZ Trading Eligible for Section 10AA Deductions.

M/s Gitanjali Exports Corporation Limited Versus ADCIT-5 (1), Mumbai And Vice-Versa

The Tribunal upheld the classification of interest income from fixed deposits as 'income from other sources,' impacting Section 10AA/10A deductions. It ... Netting of Interest income and expenditure - Deduction u/s 10AA/10A- The assessee has raised grounds in regard to treating the FDs kept as margin money with Bank against credit facilities as income from other sources instead of income from business and not netting such interest against interest payment to Banks, for calculation of deduction under Section 10AA & 10A. HELD THAT:- Interest income and expenditure income has to be netted of, if there is a nexus. Netting of interest is allowed and AO is directed to compute the net income of interest or expenditure. If after netting of interest it is found that interest income is more than the interest expenditure then the surplus income has to be treated as income from other sources, otherwise no deduction is to be made while calculating deduction under Section 10AA/10A. Decision in the case of M/S ACG ASSOCIATED CAPSULES PVT. LTD. (FORMERLY M/S ASSOCIATED CAPSULES PVT. LTD.) & OTHERS VERSUS THE COMMISSIONER OF INCOME TAX, CENTRAL-IV, MUMBAI & OTHERS [2012 (2) TMI 101 - SUPREME COURT], relied upon. 'Services' under IT Act and SEZ Act - Deduction u/s 10AA - The AO disallowed the deduction under Section 10AA by observing that the exemption claimed u/s. 10AA is applicable only for manufacturing unit as per the Act, whereas the assessee was involved in trading activities in Surat SEZ areas. Income Tax Act defines 'service' essentially as professional and technical services. The assessee has done simple trading and, therefore, on trading activity deduction under Section 10AA is not allowable. Assessee claimed that SEZ Act section 2(z) defines 'services' to include tradable services. - HELD THAT: - According to Section 51 of the SEZ Act, it has been provided that the provision of SEZ Act will override the provision of Income Tax Act. Trading done by the assessee is a service and, therefore, deduction u/s 10AA is allowable. Decision in the case of DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2 VERSUS GOENKA DIAMOND & JEWELLERS LTD. [2012 (3) TMI 258 - ITAT JAIPUR], relied upon. Issues Involved:1. Classification of interest income on fixed deposits as 'income from other sources' versus 'income from business.'2. Netting of interest income against interest expenditure for the purpose of deduction under Section 10AA/10A.3. Disallowance of interest under Section 36(1)(iii) related to capital borrowed for asset acquisition.4. Eligibility for deduction under Section 10AA for trading activities in SEZ.Detailed Analysis:1. Classification of Interest Income:The primary issue was whether the interest income earned from fixed deposits kept as margin money with banks should be classified as 'income from other sources' or 'income from business.' The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] both held that such interest income should be treated as 'income from other sources' and not business income. This classification impacted the calculation of deductions under Section 10AA/10A, as the interest income was not considered derived from manufacturing activities. The Tribunal upheld this classification, stating that it is settled law that interest income is to be assessed as income from other sources for the purpose of deductions under Sections 10AA/10A.2. Netting of Interest Income Against Interest Expenditure:The second issue was whether the interest income should be netted against interest expenditure for calculating deductions under Section 10AA/10A. The AO denied this netting, but the Tribunal, referencing the Supreme Court decision in [2012] 343 ITR 89, allowed the netting of interest. The Tribunal directed the AO to compute the net interest income or expenditure. If the netting resulted in surplus interest income, it should be treated as income from other sources; if the expenditure exceeded the income, no deduction should be made while calculating deductions under Section 10AA/10A.3. Disallowance of Interest Under Section 36(1)(iii):The third issue concerned the disallowance of interest under Section 36(1)(iii) for capital borrowed for asset acquisition. The AO disallowed interest deductions, treating them as attributable to capital borrowed for acquiring assets shown under capital work-in-progress. The CIT(A) confirmed this disallowance. However, the Tribunal referred to its previous decision in Mehta Brothers Gems Pvt. Ltd. Vs. ACIT, where it was held that if the payments for asset acquisition were made from the assessee's own funds, no interest disallowance should be made. The Tribunal found the facts similar and allowed the issue in favor of the assessee, directing that no interest disallowance should be made if the payments were from own funds.4. Eligibility for Deduction Under Section 10AA for Trading Activities:The fourth issue was whether the assessee's trading activities in SEZ qualified for deductions under Section 10AA. The AO disallowed these deductions, arguing that Section 10AA benefits were only for manufacturing or service activities, not trading. The CIT(A) reversed this decision, citing the SEZ Act's definition of 'services' to include trading. The Tribunal upheld the CIT(A)'s decision, referencing the SEZ Act's Section 51, which provides that SEZ provisions override other laws. The Tribunal also noted that the Ministry of Commerce & Industry's circulars supported the inclusion of trading as a service eligible for Section 10AA deductions. The Tribunal found no infirmity in the CIT(A)'s findings and confirmed the order, allowing deductions for trading activities in SEZ.Conclusion:In conclusion, the Tribunal allowed the netting of interest income against interest expenditure and confirmed the eligibility of trading activities for Section 10AA deductions. It also ruled in favor of the assessee regarding the disallowance of interest under Section 36(1)(iii) if the payments were made from own funds. The appeals of the assessees were allowed in part, and the department's appeals were dismissed.