ITAT decision: Assessee wins on trading addition, Section 14A disallowance, and FDR interest.

The ITAT dismissed the department's appeal and partly allowed the assessee's appeal. The ITAT ruled in favor of the assessee on the issues of trading addition, disallowance under Section 14A, and interest income from FDRs. The ITAT also directed the AO to allow depreciation on wind energy generators as per a previous order.

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Issues Involved:
1. Deletion of trading addition made by the Assessing Officer.
2. Sustaining disallowance under Section 14A.
3. Depreciation on WEG installed in the A.Y. 2008-09.
4. Addition of interest earned on FDR under Section 10B.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition Made by the Assessing Officer:
The department's grievance related to the deletion of a trading addition made by the Assessing Officer (AO). The AO noted a lower Gross Profit (GP) rate for the Non-Export Oriented Unit (Non-EOU) compared to the Export Oriented Unit (EOU) and applied a GP rate of 35.54% for Unit-I, resulting in an addition of Rs. 40,77,246/-. The assessee explained the differences in GP rates due to tax exemptions for the EOU unit and maintained separate books for both units. The CIT(A) observed that the AO did not reject the books of accounts or point out specific defects. The CIT(A) noted that the AO's comparison of the two units was inappropriate due to their different operational natures. The ITAT upheld the CIT(A)'s decision, stating that the AO's presumption was incorrect and that the addition without rejecting the books of accounts was not justified.

2. Sustaining Disallowance Under Section 14A:
The AO disallowed Rs. 15,05,443/- under Section 14A, considering the interest paid on borrowings used for investments in tax-free bonds and mutual funds. The assessee argued that no borrowed funds were used for these investments and that interest paid to partners was allowable under Section 40(b). The CIT(A) upheld the disallowance, but the ITAT found that no nexus was established between interest-bearing funds and the investments. The ITAT noted that the assessee had sufficient non-interest bearing funds and that similar disallowances were not made in previous years. Consequently, the ITAT deleted the disallowance.

3. Depreciation on WEG Installed in the A.Y. 2008-09:
The assessee contended that the depreciation issue was covered by an earlier ITAT order, which allowed depreciation on wind mills. The ITAT directed the AO to allow depreciation on the written down value as per the previous order, thus allowing the assessee's appeal for statistical purposes.

4. Addition of Interest Earned on FDR Under Section 10B:
The AO added Rs. 8,63,024/- as interest income from FDRs, not allowing exemption under Section 10B. The assessee argued that the FDRs were pledged for business purposes, making the interest business income. The CIT(A) upheld the addition, but the ITAT found that the FDRs were pledged for commercial expediency. Citing relevant case laws, the ITAT concluded that the interest income was business income and eligible for deduction under Section 10B, thus allowing the assessee's appeal.

Conclusion:
The ITAT dismissed the department's appeal and partly allowed the assessee's appeal, providing relief on the issues of trading addition, disallowance under Section 14A, and interest income from FDRs. The issue of depreciation was allowed for statistical purposes.

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