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July 20, 2022

Interest earned on Fixed Deposits is not available for deduction u/s 80-IC

by CA Shivam Jaiswal in Income Tax

Interest earned on Fixed Deposits is not available for deduction u/s 80-IC

Facts and Issues of the case

The appellant is a partnership firm engaged in the business of manufacturing and export of home furnishings item like, quilts, bedspread, cushion cover, etc. In the return, the appellant claimed deduction under section 80-IC of the Income- tax Act, 1961 (‘the Act’) in respect of profits derived from its manufacturing units in the State of Uttarakhand.

During the year under consideration, the assesse received consideration amounting to Rs.1, 91, 78,974 /- from sale of Focus Scrip/ License received under “Focus Products Scheme” under the Foreign Trade Policy which was claimed as deduction under section 80 -IC of the Act. In the assessment order, the Assessing Officer denied deduction of income received from sale of FPS on the ground that such income is not related to manufacture or sale of the products. Of the undertaking and is only related to a post manufacturing event, which is not eligible for deduction under section 80-IC of the Act

Observations by the Court

The Court heard the arguments of both the parties and perused the material available on record.

During the relevant year, it was argued that in order to avail overdraft facility, the bank mandated pledge of fixed deposits. Against fixed deposits so pledged, overdraft limit is allowed to the extent of 90% of the amount of fixed deposit. Interest is charged on the overdraft facility is more than the interest allowed on the fixed deposits with the bank.

In the present case, the appellant, in order to avail overdraft facility, made fixed deposits of Rs.22 .86 Lakhs, out of the business funds available with the appellant.  The said fixed deposits were pledged with the bank for availing overdraft facility. Interest on FDR was granted @ 9% p.a., whereas interest on overdraft facility was charged by the bank @11 % p.a.

The appellant received interest of Rs.6 ,58,683/-  and incurred bank interest and commission charges of Rs.33 ,14,931 /- which included interest on overdraft facility. It was argued that interest expenditure on overdraft facility availed exceeded interest income on fixed deposit pledged to avail such facility. There was, thus, no interest income effectively earned by the appellant and therefore, interest income was not required to be excluded for the purpose of computing profit eligible for deduction under section 80 -IC of the Act.

After going through the entire issue, we hold that interest earned out of the fixed deposit made from the surplus funds being not connected to the manufacturing activity and do not form an integral part of the profits derived from industrial unit  is  not eligible for deduction. Interest is an unearned passive income derived out of non-manufacturing activity.

Conclusion

Interest earned on Fixed Deposits is not available for deduction u/s 80-IC

Narayan-Industries-Vs-ACIT-ITAT-Delhi-2

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