Deduction allowed for interest income under section 80IB; Disallowance limited to 1% of exempt dividend income.

The Tribunal upheld the allowance of deduction under section 80IB for interest earned from fixed deposits, citing a direct nexus to business activity based on a previous decision by the Calcutta High Court. Additionally, the Tribunal agreed with the ld. CIT(A)'s decision to limit the disallowance under section 14A to 1% of exempt dividend income, dismissing the Revenue's appeal on both grounds.

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Issues:
1. Allowance of deduction under section 80IB for interest earned from fixed deposits.
2. Disallowance under section 14A for expenditure related to earning exempt income.

Analysis:

Issue 1: Allowance of deduction under section 80IB for interest earned from fixed deposits:
The appeal by the Revenue challenges the order of the ld. Commissioner of Income Tax-(Appeals)-1, Kolkata for the assessment year 2006-07. The first ground of appeal questions the allowance of deduction of &8377; 29,62,628/- under section 80IB of the I.T. Act, 1961 for interest earned from fixed deposits. The Tribunal notes that the issue is similar to a previous decision by the Hon'ble Calcutta High Court in the assessee's own case for A.Y. 2003-04. The High Court had allowed a similar claim for deduction under section 80IB, emphasizing the direct nexus between the interest income and the business activity. The Tribunal, finding the facts and material similar to the previous case, upholds the decision of the ld. CIT(A) and dismisses Ground No. 1 of the appeal.

Issue 2: Disallowance under section 14A for expenditure related to earning exempt income:
The second ground of appeal concerns the disallowance under section 14A for expenditure incurred in relation to earning exempt income. The Assessing Officer had disallowed &8377; 5,00,000/-, which was reduced by the ld. CIT(A) to &8377; 24,996/-, being 1% of the exempt dividend income. The Tribunal acknowledges that prior to the introduction of Rule 8D, the disallowance under section 14A had to be based on a reasonable basis. Both sides agree that a disallowance of 1% of the exempt dividend income is fair and reasonable. Consequently, the Tribunal finds no issue with the ld. CIT(A)'s decision to restrict the disallowance to &8377; 24,996/- and upholds the same, leading to the dismissal of Ground No. 2 of the Revenue's appeal.

In conclusion, the Tribunal dismisses the Revenue's appeal, affirming the decisions of the ld. CIT(A) on both grounds. The order was pronounced in the open Court on July 8, 2016.

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