2013 (11) TMI 563 - AT - Income Tax

Tribunal ruling: Interest income from Fixed Deposits as 'income from other sources' for deductions. Netting allowed with nexus.

M/s GITANJALI EXPORTS CORPORATION LTD Versus ASSTT DEPUTY COMMISSIONER OF INCOME TAX MUMBAI

M/s GITANJALI EXPORTS CORPORATION LTD Versus ASSTT DEPUTY COMMISSIONER OF INCOME TAX MUMBAI - TMI Issues Involved:1. Treatment of interest income from Fixed Deposits (FDs) as 'income from other sources' vs. 'business income.'2. Netting of interest income against interest expenditure for the calculation of deductions under Sections 10AA and 10A.3. Disallowance of interest under Section 36(1)(iii) for capital borrowed for asset acquisition.4. Eligibility for deduction under Section 10AA for trading activities in SEZ.Issue-wise Detailed Analysis:1. Treatment of Interest Income from FDs:The primary issue was whether the interest income from FDs kept as margin money with banks against credit facilities should be treated as 'income from other sources' or 'business income.' The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated this interest income as 'income from other sources,' reducing the deduction under Sections 10AA and 10A. The Tribunal upheld this view, stating that it is a settled position in law that interest income is to be assessed as 'income from other sources' and not under the head 'business income' for the purpose of deduction under Sections 10AA and 10A.2. Netting of Interest Income Against Interest Expenditure:The AO and CIT(A) denied the netting of interest income against interest expenditure. However, the Tribunal, referencing the Hon'ble Supreme Court decision in [2012] 343 ITR 89, allowed the netting of interest. The Tribunal directed that if there is a nexus between the interest income and expenditure, the netting should be allowed. The AO was instructed to compute the net interest income or expenditure and treat any surplus as 'income from other sources.'3. Disallowance of Interest under Section 36(1)(iii):The AO disallowed interest under Section 36(1)(iii) by treating it as interest attributable to capital borrowed for asset acquisition, resulting in disallowances of Rs.52,18,944/- for 2006-07 and Rs.17,06,082/- for 2007-08. The CIT(A) confirmed these disallowances. However, the Tribunal, referencing the decision in Mehta Brothers Gems Pvt. Ltd. Vs. ACIT, noted that the payments for asset acquisition were made from the assessee's own funds, not borrowed funds. Consequently, the Tribunal set aside the CIT(A)'s order and deleted the addition, allowing the issue in favor of the assessee for both years.4. Eligibility for Deduction under Section 10AA for Trading Activities in SEZ:The AO disallowed the deduction under Section 10AA, arguing that the exemption is applicable only for manufacturing units, not for trading activities. The CIT(A) reversed this decision, allowing the deduction by interpreting 'services' under the SEZ Act to include trading activities. The Tribunal upheld the CIT(A)'s decision, referencing the SEZ Act, which defines 'services' to include trading. The Tribunal also noted that under Section 51 of the SEZ Act, the provisions of the SEZ Act override other laws, including the Income Tax Act. The Tribunal cited the Jaipur Bench decision in Goenka Diamonds and Jewellery Limited, confirming that trading activities qualify for deductions under Section 10AA.Conclusion:- Appeals of the assessees for the assessment years 2006-07 & 2007-08 were allowed in part.- Appeals of the department were dismissed.- The Tribunal upheld the CIT(A)'s decision on allowing deductions under Section 10AA for trading activities and the netting of interest, while deleting the disallowance of interest under Section 36(1)(iii).