2015 (10) TMI 2701 - AT - Income Tax

Revision u/s 263 - whether the interest earned from fixed deposit was to be assessed under the head Income from other sources or as Business Income - Held that - CIT in his order dated 19th March 2013 passed u/s 263 of the Act has held that the issue is not free from doubt that the income earned by the assessee company from fixed deposits kept with the banks could be assessed as Income from other sources and the AO to re-decide the issue as to whether the interest income earned from fixed deposit with bank is to be assessed under the head Income from other sources or as Business income clearly reveals that the CIT instead of giving final finding on this issue observed that the income earned by the assessee company from the fixed deposit with bank could be assessed as Income from other sources as matter is not free from doubt itself shows that there is no finding or adjudication by the CIT and his observations are based on mere suspicion and are uncertain . Yet a direction was issued to the AO to carry out fresh inquiries to do the exercise once again and decipher whether income earned from fixed deposit with bank by the assessee company could be assessed under the head Income from other sources , thus CIT was unsure whether the treatment meted out by the assessee company in treating the said income from interest on FDR with bank as Income from Business is right or wrong which does not show that the finding as arrived at by the AO is erroneous and hence the order of CIT does not meet the requirement of Section 263 of the Act. Our view is fortified by the judgment of Hon ble Delhi High Court of Globus Infocom Ltd. v. CIT (2014 (9) TMI 18 - DELHI HIGH COURT) and also CIT v. Gabriel India Limited (1993 (4) TMI 55 - BOMBAY High Court) Thus set aside to the file of the AO to re-decide the issue as to whether the interest income earned from fixed deposit with bank is to be assessed under the head Income from other sources or as Business income is unsustainable in law and is set aside and the assessment order of the AO dated 08th October 2010 passed u/s 143(3) of the Act is restored . We order accordingly.

Summary

Issues Involved:
1. Whether the interest earned from fixed deposits should be assessed under the head "Income from other sources" or "Business Income".
2. Whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of Revenue.

Issue-wise Detailed Analysis:

1. Nature of Interest Income:
The primary issue revolves around whether the interest income earned from fixed deposits by the assessee company should be classified as "Income from other sources" under Section 56 of the Income Tax Act, 1961, or as "Business Income." The assessee company, a subsidiary of Canara Bank, was originally a Primary Dealer (PD) in government securities accredited by RBI until February 2007, after which it diversified into the stock broking business. The company liquidated its stock-in-trade of government securities and treasury bills, generating liquid funds, which were temporarily parked in fixed deposits with banks. The assessee contended that these funds were part of its circulating capital and thus the interest income should be treated as "Business Income."

The CIT, however, observed that the interest income of Rs. 15,18,20,478/- earned on fixed deposits was from surplus funds and should be assessed under the head "Income from other sources." The CIT relied on several judicial precedents, including Krishna Polyester Ltd. v. DCIT and Ferro Concrete Construction (India) Pvt. Ltd. v. CIT, to support this view. The CIT issued a show-cause notice and subsequently passed an order under Section 263, setting aside the AO's assessment order, which had treated the interest income as "Business Income."

2. Erroneous and Prejudicial Order:
The CIT held that the AO's order dated 08th October 2010, which accepted the interest income as "Business Income," was erroneous and prejudicial to the interest of Revenue. The CIT's rationale was that the AO had not applied his mind to the issue and had not examined whether the interest income should be assessed under "Income from other sources." The CIT directed the AO to re-examine the issue.

The assessee company argued that the AO had taken one of the possible views, which was a plausible view, and thus the order could not be considered erroneous. The assessee relied on several judicial precedents, including Malabar Industrial Co. Ltd. v. CIT and CIT v. Gabriel India Limited, to support its contention that if two views are possible, the AO's view should prevail.

Tribunal's Findings:
The Tribunal observed that the funds from the liquidation of government securities and treasury bills were part of the assessee's circulating capital. These funds were temporarily parked in fixed deposits before being deployed in the new stock broking business. The Tribunal held that the interest income from these fixed deposits was linked to the circulating capital and should be treated as "Business Income." The Tribunal further noted that the AO's view was a possible view and that the CIT could not substitute his view in the proceedings under Section 263.

The Tribunal distinguished the cases relied upon by the CIT, noting that the facts in those cases were different from the present case. The Tribunal concluded that the AO had applied his mind and taken a possible view, and thus the order was neither erroneous nor prejudicial to the interest of Revenue.

Conclusion:
The Tribunal set aside the CIT's order dated 19th March 2013 under Section 263 and restored the AO's assessment order dated 08th October 2010. The appeal of the assessee company was allowed, and the interest income from fixed deposits was to be assessed as "Business Income."

Order Pronounced:
The order was pronounced in the open court on 28th October 2015.