2021 (9) TMI 226 - AT - Income Tax

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

Quadro Info Technologies Pvt. Ltd. Versus Income Tax Officer, Ward-1 (4)

The Tribunal partly allowed the appeal, directing the Assessing Officer to recompute the disallowance under Section 80IA(4) after verifying the interest ... Deduction u/s. 80IA(4)(iii) - interest income received - first contentions raised that interest was actually paid to the assessee company by M/s. Salarpuria Properties Pvt. Ltd. and although this factual position was clearly mentioned by the Assessing Officer, this fact was accepted by the Ld. CIT(A) but while deciding the issue related to the disallowance u/s. 80IA, the same was ignored/overlooked by - HELD THAT:- We accept the contention raised by the Ld. Counsel for the assessee and direct the Assessing Officer to consider only the amount of interest received by the assessee company on bank fixed deposits for making disallowance u/s. 80IA of the Act. Income derived from - As held in the various judicial pronouncements, referred to and relied upon by the Ld. CIT(A) in his impugned order including that of the Hon'ble Supreme Court, the expression 'derived from' envisages immediate nexus or first degree connection with the business of the eligible undertaking inasmuch as, the immediate source of such income should be a business of the undertaking in order to be eligible for deduction u/s. 80IA of the Act. In the present case, the immediate source of interest income was the fixed deposits kept by the assessee with the bank and not the business of the eligible undertaking of the assessee company and the same, in our opinion, is not eligible for deduction u/s. 80IA, as rightly held by the authorities below. Only the net interest income after adjustment of interest paid can be considered for disallowance u/s. 80IA - We note that the claim of the assessee for adjustment of interest can be allowed only when there is inexplicable link between the interest income earned by the assessee and the corresponding interest paid. Since the authorities below have not verified this aspect, we restore this issue to the file of the Assessing Officer for the limited purpose of verifying as to whether there is any inexplicable link between the interest paid and the interest earned by the assessee on bank deposits and recompute the disallowance accordingly on such verification, in accordance with law. Ground No. 1 & 2 of the assessee's appeal are thus partly allowed. Addition while computing the book profits u/s. 115JB of the Act on account of adjustment of depreciation - HELD THAT:- Assessee submitted that the direction give by the Ld. CIT(A) to the Assessing Officer on this issue is little confusing inasmuch as, when the depreciation as worked out under the Companies Act is debited by the assessee company to its profit and loss account, the direction should have been given by the Ld. CIT(A) to verify this aspect alone. He has also invited our attention to the profit and loss account of the assessee company listed at page 43 of the paper book and pointed out that the depreciation as worked out under the Companies Act was actually debited by the assessee company to the profit and loss account. We accordingly modify the direction of the Ld. CIT(A) as given in his impugned order and direct the Assessing Officer to verify the claim of the assessee of having debited the depreciation as computed under the Companies Act to the profit and loss account and decide this issue in accordance with Explanation 1 to Section 115JB of the Act. Ground No. 3 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 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.