2010 (4) TMI 1147 - HC - Income Tax

Interest received on FD - Whether the tribunal was right in treating the interest as an income from other sources? - Held that - It is not in dispute that the appellant is a 100% Export Oriented Unit which is engaged in export of processed gherkins and during the course of its business it would have to make certain deposits for the purpose of obtaining letter in credit or for bank guarantee when the products which are processed by it have to be exported. In terms of the said letter of credit or bank guarantee, certain deposits are made and such deposits are to be treated as margin amounts and any interest which is earned out of the said deposits has to be treated as business income and not as income earned from other sources As in the case of Satishchandra and Co. V. commissioner of Income Tax 1998 (7) TMI 73 - KARNATAKA High Court it has been held that merely because the Assessee has shown any income by way of interest, it would not become income from other sources as it has to be seen as to whether the said interest was earned out of business compulsion and as a business income. When in the said case, the Assessee has made deposit in a bank as a condition for obtaining bank guarantee to be given before the Excise Authorities as required under the Excise Rules the interest income which arose out of such transaction was held to be closely connected with the business of the Assessee and hence business income. If the income is assessable as business income then the mere circumstance that the Assessee has shown it has income from other sources or that it was assessed under the head income from other sources would not be the ground to deny the Assessee the set off of the carried forward losses. The said decision is also relevant keeping in mind the facts of the present case where the Assessee being an Export Oriented Unit had deposited the said found as margin money for the purpose of carrying on its export business. Decided in favour of the Assessee and against the Revenue

Summary

Issues:
1. Deduction under Sec.10-B of the Income Tax Act
2. Treatment of interest received on FD
3. Tribunal's decision on interest as income from other sources

Analysis:
1. Deduction under Sec.10-B of the Income Tax Act:
The appellant, a 100% Export Oriented Unit, filed for exemption under Section 10B of the Income Tax Act for the assessment year 1998-99. The Assessing Officer initially accepted the claim but later issued a notice under Section 154 to rectify the nature of income, specifically the interest income earned from fixed deposits. The appellant argued that the interest was related to business activities, not surplus deposits, and should be considered business income. The authorities disagreed, treating it as income from other sources. The appellant contended that interest earned due to business compulsions should be classified as business income, citing relevant court decisions supporting this argument.

2. Treatment of interest received on FD:
The core issue revolved around whether the interest received on fixed deposits should be categorized as income from other sources or as business income. The appellant argued that the interest was a result of business-related deposits made to obtain letters of credit or bank guarantees. The contention was that such interest, arising from business compulsions, should be considered business income rather than income from other sources. The authorities maintained that the interest did not qualify as business income, leading to a demand raised against the appellant.

3. Tribunal's decision on interest as income from other sources:
The Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) upheld the authorities' decision to treat the interest earned on fixed deposits as income from other sources. However, the High Court analyzed the facts, emphasizing that the interest was directly linked to the appellant's business operations and was earned due to business compulsions. Referring to relevant court precedents, the High Court concluded that the interest income should indeed be treated as business income and not as income from other sources. The court ruled in favor of the appellant, allowing the appeal and overturning the previous decisions.

In conclusion, the High Court's judgment favored the appellant, emphasizing that interest earned on fixed deposits due to business compulsions should be classified as business income, not income from other sources. The decision highlighted the importance of considering the business context and purpose behind such earnings, ultimately allowing the appeal and ruling against the Revenue's position.