Tribunal Upholds Disallowance of Interest Income as Deduction

PPN Power Generating Company Pvt. Ltd., Versus The Assistant Commissioner of Income-tax, Company Circle-V (2), Chennai

PPN Power Generating Company Pvt. Ltd., Versus The Assistant Commissioner of Income-tax, Company Circle-V (2), Chennai - TMI Issues:
1. Appeal against orders of Commissioner of Income-tax(Appeals) for assessment years 2006-07, 2007-08, and order under sec.263 for the assessment year 2008-09.
2. Treatment of interest income earned from deposits made in trust and retention account under financing agreement as business income for deduction u/s.80IA.
3. Validity of invoking sec.263 to withdraw deduction given to the assessee regarding interest income from fixed deposits.

Analysis:
1. The appeals in ITA Nos.569 & 570/Mds/12 challenged orders of Commissioner of Income-tax(Appeals) for assessment years 2006-07 and 2007-08. The issue revolved around treating interest income earned from deposits in trust and retention account under financing agreement as business income for deduction u/s.80IA. The Commissioner rejected the claim based on the judgment of the Supreme Court in Pandian Chemicals Ltd. case, stating such receipts are not derived from the eligible undertaking for deduction. The appellant argued that the interest income was directly connected to the manufacturing activity and should be considered part of business profit. However, the Tribunal upheld the Commissioner's decision, citing various Supreme Court judgments on the interpretation of "derived from" in relation to business income.

2. The appellant contended that the interest earned from fixed deposits in trust account should be netted off against interest income of the trust, as the monies were held on behalf of lenders and not usable by the assessee. The Tribunal considered the direct nexus between profits and the industrial undertaking as per Supreme Court precedents. It concluded that interest earned from deposits under the financing agreement could not be classified as profits derived from the industrial undertaking. The Tribunal dismissed the appeal, stating that the interest paid and received did not share the same character, in line with Supreme Court rulings.

3. In ITA No.1188/Mds/2013, the appellant challenged the invocation of sec.263 to withdraw deduction given for interest income received from fixed deposits. The Tribunal upheld the Commissioner's decision, stating that the interest income should be considered as income from other sources, not business income. As the interest income was previously determined to be from other sources, the Tribunal found the order of the Assessing Officer justifiable under sec.263. Consequently, the appeals in ITA Nos.569, 570/Mds/2012 and 1188/Mds/2013 were dismissed, affirming the decision to treat the interest income as not eligible for deduction u/s.80IA.

This comprehensive analysis highlights the key arguments, legal interpretations, and conclusions drawn by the Tribunal in addressing the issues raised in the legal judgment.