By TIOL News Service

JAIPUR, AUG 14, 2018: THE ISSUE BEFORE THE BENCH IS - Whether since interest earned by assessee on income-tax refunds is assessable only under 'Income from other sources' and not as part of profits and gains of power generation business, the same cannot be held eligible for deduction u/s 80IE. AND THE VERDICT IS YES.

Facts of the case

The assessee-joint venture was engaged in manufacturing and commissioning of pen stock steel liner, steel Radial Gates of Hydro mechanical works in the State of Arunachal Pradesh. During the year under consideration, the assessee declared gross total income of around Rs. 14.22 cr and the same was claimed as exempt u/s 80IE and total income was declared at Nil. During the course of assessment proceedings, the AO observed that the assessee had shown income under the head 'Other sources' amounting to around Rs. 4.47 lakhs which consists of interest on income tax refund amounting to around Rs. 3.53 lakhs and other miscellaneous receipts. As per the AO, in order to claim deduction, the profits should had been derived by the undertaking from manufacture or production of eligible article or thing and there must be direct nexus between profit and manufacturing activity of the industrial undertaking. The income from other sources may constitute profit of business u/s 28 but it could not be construed as profits derived by the industrial undertaking. Accordingly, the AO held that the assessee was not eligible to claim such deduction. On assessee's appeal, the CIT(A) allowed partial relief to the assessee in respect of miscellaneous receipt but, as far as interest on income tax refund was concerned, the action of the AO was confirmed.

The Tribunal held that.

++ following the Coordinate Bench decision in the case of Atria Power Corporation Ltd.v. DCIT, where it was held that "..... income-tax paid is not allowed as a deduction in computing the profits of the business. Section 10(4) of the 1922 Act prohibited the allowance of income-tax payment as a deduction in computing the profits of the business. The present section 40(a)(ii) is the successor of the above sub-section. If income-tax payment is a personal obligation and not the obligation of the business, then it follows that the payment of tax, albeit out of the coffers of the business, has to be divorced from business considerations and it follows further that any interest received on excess payment of Income-tax can never be considered and assessed under the head ‘Profits and gains of business'. For such reasons, the contention of the assessee that the interest earned on income-tax refunds was assessable as part of the profits and gains of the power generation business could not be accepted. It was opined that the interest was assessable under the head ‘Income from other sources' as rightly assessed by the Assessing Officer. If that was so, some tax was payable on the interest income of Rs. 3,81,501 which would be admittedly less than the book profit tax payable under section 115JB. The assessee was, therefore, liable to pay book profit tax under the section as demanded by the Assessing Officer......" interest on income tax refund is held not eligible for deduction under section 80IE of the Act and the action of the CIT(A) is hereby confirmed.

(See 2018-TIOL-1283-ITAT-JAIPUR)