Tribunal directs AO to recompute disallowance under Section 80IA(4) and verify depreciation for book profit under Section 115JB.

The Tribunal partly allowed the appeal, directing the Assessing Officer to recompute the disallowance under Section 80IA(4) after verifying the interest received and any link between the interest paid and earned. Additionally, the AO was instructed to verify the depreciation debited in the profit and loss account for computing book profit under Section 115JB.

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Issues Involved:
1. Disallowance of Rs. 3,85,596/- claimed as deduction under Section 80IA(4)(iii) of the Income Tax Act, 1961.
2. Addition of Rs. 30,93,318/- while computing book profits under Section 115JB of the Income Tax Act, 1961 on account of adjustment of depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 3,85,596/- Claimed as Deduction Under Section 80IA(4)(iii):

The assessee, a company engaged in property development, filed its return of income for the relevant year declaring book profit of Rs. 7,45,54,677/- under Section 115JB and total income at 'Nil' under the normal provisions after claiming deduction under Section 80IA. The Assessing Officer (AO) disallowed the deduction of Rs. 3,85,596/- claimed under Section 80IA(4)(iii) for interest income received on bank fixed deposits and a loan given to M/s. Salarpuria Properties Pvt. Ltd., stating that the interest income did not constitute profits derived from the business of operating and maintaining an industrial park.

The assessee challenged this disallowance before the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the interest from bank deposits was related to its business and should be eligible for deduction under Section 80IA. Additionally, the assessee contended that the disallowance should be restricted to the net amount of interest.

The CIT(A) upheld the AO's disallowance, citing various judicial decisions which clarified that interest income on fixed deposits does not have a direct nexus with the business activities of the industrial undertaking and thus cannot be included for deduction under Section 80IA. The CIT(A) also rejected the alternate plea for netting off the interest paid against the interest received, referencing the Supreme Court decision in CIT v. Dr. V.P. Gopinathan.

Upon further appeal, the Tribunal considered three main contentions from the assessee:
- The interest of Rs. 1,56,403/- was actually paid to the assessee by M/s. Salarpuria Properties Pvt. Ltd., not received, and thus should not be included in the disallowance. The Tribunal accepted this contention and directed the AO to consider only the interest received on bank fixed deposits of Rs. 2,29,193/-.
- The fixed deposits were kept against overdraft facilities for business purposes, and hence the interest should be eligible for deduction. The Tribunal rejected this contention, stating that the immediate source of the interest income was the fixed deposits, not the business of the eligible undertaking.
- Only the net interest income after adjusting the interest paid should be considered for disallowance. The Tribunal remanded this issue to the AO for verification of any inexplicable link between the interest paid and earned, directing the AO to recompute the disallowance accordingly.

2. Addition of Rs. 30,93,318/- While Computing Book Profits Under Section 115JB:

While computing the book profits under Section 115JB, the AO added back the depreciation of Rs. 6,64,63,511/- debited in the profit and loss account as per the Companies Act and reduced the depreciation of Rs. 6,33,73,193/- as per the Income Tax Act, resulting in an addition of Rs. 30,93,318/- to the book profit.

The assessee challenged this addition before the CIT(A), arguing that the addition was incorrect as per the provisions of Section 115JB, which require the amount of depreciation debited in the profit and loss account (excluding depreciation on revaluation of assets) to be reduced. The CIT(A) directed the AO to verify whether the depreciation of Rs. 6,33,73,193/- was debited to the profit and loss account and adjust the book profit accordingly.

The Tribunal, upon hearing the arguments, noted that the profit shown in the profit and loss account should be increased by the amount of depreciation for computing book profit as per Clause (g) of Explanation 1 to Section 115JB and that the depreciation debited (excluding revaluation) should be reduced. The Tribunal modified the CIT(A)'s direction, instructing the AO to verify the assessee's claim of having debited the depreciation of Rs. 6,64,63,511/- as computed under the Companies Act and decide the issue in accordance with Explanation 1 to Section 115JB.

Conclusion:

The appeal was partly allowed, with directions to the AO to:
- Recompute the disallowance under Section 80IA(4) after verifying the interest received and any inexplicable link between the interest paid and earned.
- Verify the depreciation debited in the profit and loss account for computing book profit under Section 115JB.

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