2014 (5) TMI 1119 - HC - Income Tax

Interest earned on fixed deposits - income from other sources OR business income - nature of income - Held that - The F.D.R. have not been received by Assessee for the purpose of investing money or otherwise but it is a part and parcel of his regular business activities in which he has to furnish security to the Department to obtain civil contracts and if an interest has been earned thereon in my view it will qualify to be an income on business and not as income from other sources . Also F.D.R. were purchased for security purposes for obtaining the contracts and the Court observed that it is in connection with the business activities of Assessee which was the view taken by Commissioner also so as to hold that income earned on such F.D.R. is to be treated as business income and not as income from other sources .

Summary

Issues Involved:
1. Disallowance of depreciation claimed by the petitioner.
2. Treatment of interest earned on Fixed Deposit Receipts (F.D.R.) as "income from other sources" instead of "business income".

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed by the Petitioner:

The petitioner, a registered partnership firm engaged in civil works contracts, filed a return for the Assessment Year 2009-10, claiming depreciation of Rs. 25,67,785/-. The Revenue disallowed this claim based on Sections 44AD, 44AE, and 44AF of the Income Tax Act, 1961, which provide special provisions for computing profits and gains of certain businesses. These sections stipulate that any deductions allowable under Sections 30 to 38, which include depreciation, are deemed to have already been given full effect to, and no further deduction is allowed. The court noted that these provisions were inserted post-1994 and are applicable to the relevant assessment year. The petitioner's reliance on a Division Bench judgment in Commissioner of Income Tax, Kanpur Vs. Bishambhar Dayal and Company, Kanpur was found inapplicable as it pertained to an earlier assessment year (1987-88) when the said provisions were not in force. Consequently, the court upheld the Revenue's view, finding no error in disallowing the depreciation claimed by the petitioner.

2. Treatment of Interest Earned on F.D.R. as "Income from Other Sources" Instead of "Business Income":

The petitioner argued that the interest earned on F.D.R.s, which were taken as security for obtaining civil contracts, should be treated as "business income" rather than "income from other sources". The court referred to the Karnataka High Court's judgment in Commissioner of Income Tax Vs. Chinna Nachimuthu Constructions, which, relying on the Supreme Court's decision in CIT Vs. Govinda Choudhury and Sons, held that interest accrued on deposits made to secure bank guarantees for contract work should be treated as business income. The court found this reasoning applicable to the present case, as the F.D.R.s were part of the petitioner's regular business activities and were required for furnishing security to obtain civil contracts. Additionally, the court noted a similar case involving M/s Gupta Construction Company, where interest on F.D.R.s was treated as business income, and the Revenue's appeal was dismissed. Consequently, the court held that the interest earned on F.D.R.s qualifies as "business income" and not "income from other sources".

Conclusion:

The writ petition was partly allowed. The court set aside the impugned orders dated 13.10.2011 and 4.3.2013 to the extent that they treated the income earned on F.D.R.s as "income from other sources". The Assessing Authority was directed to pass a consequential order in light of the court's observations, recognizing the interest on F.D.R.s as "business income".