ITAT upholds exclusion of interest income under Section 80IB, finds purchases genuine. Compensatory interest not penal.

The ITAT partly allowed the revenue's appeal by upholding the exclusion of interest income from the deduction under Section 80IB but dismissed the revenue's grounds on the issues of bogus purchases and interest payment for late sales tax deposit. The CIT (A) and ITAT found the purchases genuine with supporting documents, and the interest payment compensatory, not penal. The ITAT emphasized the compensatory nature of the interest payment, dismissing the revenue's contentions. The order was pronounced on 24-08-2012.

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Issues Involved:
1. Bogus purchase of Rs. 5,62,17,980/-
2. Payment of interest for sales tax deposit of Rs. 4,50,405/-
3. Consideration of interest of FDR of Rs. 6,38,558 for calculating deduction u/s. 80IB

Issue-wise Detailed Analysis:

1. Bogus Purchase of Rs. 5,62,17,980/-:
The revenue challenged the deletion of Rs. 5,62,17,980/- on account of bogus purchases. The assessee was found to have purchased goods aggregating to Rs. 22,48,71,920/- from entities operated by Mr. Atul Bansal, which were alleged to be accommodation entries. The Additional Commissioner of Income Tax directed the AO to disallow 25% of these purchases, amounting to Rs. 5,62,17,980/-, based on the ITAT judgment in the case of M/s. Vijay Proteins Ltd. Vs. ACIT.

The CIT (A) deleted the addition, noting that the purchases were genuine and supported by various documents such as stock registers, freight receipts, and sales tax forms. The CIT (A) emphasized that the sales had been accepted by the Excise and Trade department, and thus, the corresponding purchases should also be accepted. The CIT (A) concluded that there was no definite material finding to establish that the purchases were bogus.

The ITAT upheld the CIT (A)'s decision, stating that the information from the Investigation Wing could not be held as clinching evidence without independent inquiry and corroboration. The ITAT found that the AO's reliance on the Vijay Proteins case was misplaced, as the facts of the present case were distinguishable. The ITAT noted that the purchases were supported by account payee cheques, transportation vouchers, and sales tax forms, and the quantities of purchases and sales had been accepted by the AO. The ITAT concluded that the addition was based on assumptions and suspicions, which could not be considered as proof. Therefore, the ITAT dismissed the revenue's ground on this issue.

2. Payment of Interest for Sales Tax Deposit of Rs. 4,50,405/-:
The AO disallowed the interest payment of Rs. 4,50,405/- on the late deposit of sales tax, treating it as a penalty under Section 37 of the IT Act. The CIT (A) allowed the interest payment, stating that it was compensatory in nature and not a penalty. The CIT (A) cited various judicial decisions supporting the view that interest paid on arrears of sales tax is an admissible deduction.

The ITAT upheld the CIT (A)'s decision, noting that the interest payment was compensatory for the late payment of sales tax dues and not penal in nature. The ITAT emphasized that merely because the term "penalty" is used in the statute does not change the compensatory nature of the payment. Therefore, the ITAT dismissed the revenue's ground on this issue.

3. Consideration of Interest of FDR of Rs. 6,38,558 for Calculating Deduction u/s. 80IB:
The AO excluded the interest income of Rs. 6,38,558/- from the computation of deduction under Section 80IB, stating that it was not attributable to the assessee's business of manufacturing. The assessee conceded that this issue was covered against it by the Supreme Court judgment in the case of Liberty India 317 ITR 218.

The ITAT allowed the revenue's ground on this issue, as the assessee had conceded that the exclusion of interest income from the computation of deduction under Section 80IB was in line with the Supreme Court judgment.

In conclusion, the ITAT partly allowed the revenue's appeal by upholding the exclusion of interest income from the computation of deduction under Section 80IB but dismissed the revenue's grounds on the issues of bogus purchases and interest payment on the late deposit of sales tax. The order was pronounced in open court on 24-08-2012.

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