2013 (12) TMI 1251 - HC - Income Tax

Whether interest income earned on surplus amount of funds involved in FDRs be treated as business income - Held that - Following Totgar s Co-operative Sale Society Ltd v. Income-Tax Officer 2010 (2) TMI 3 - SUPREME COURT - The interest on the FDRs cannot be treated as income from profits and gains of business - The word income has been defined in Section 2 (24) (i) of the Act to include profits and gains . Sub-section is an inclusive. The business profits have been specifically included in the word income - The assessee-company had invested the surplus funds which were not immediately required by it in FDRs which were later on encashed and used for expansion of business - The deposits made by the company were not in the regular course of business nor it was the business of the company to make deposits and earn interest - The interest income cannot be said to be attributable to the activities of the company. The interest had accrued on the funds which were not immediately required by the assessee-company for its business purposes and which were invested in FDRs - The assessee company is engaged in the business of manufacture of oxygen and nitrogen gas; re-rolling of steel; and fabrication of railway wagons. The surplus profits retained by the company were kept in FDRs - The interest earned on such income was not earned out of business regularly carried out by the assessee company - Decided in favour of Revenue. Deduction u/s 32AB of interest earned on FDRs - Held that - The AO had rightly disallowed the deductions under Section 32AB out of the interest income treating the same as income from other sources - Decided in favour of Revenue.

Summary

Issues Involved:
1. Classification of interest income from Fixed Deposit Receipts (FDRs) - whether it should be treated as business income or income from other sources.
2. Legality of allowing deductions under Section 32AB of the Income Tax Act out of the interest income earned on FDRs.

Issue-wise Detailed Analysis:

1. Classification of Interest Income from FDRs:
The primary issue revolves around whether the interest income generated from surplus funds invested in FDRs should be classified as business income or income from other sources. The respondent-assessee, a Hindu Undivided Family (HUF) engaged in manufacturing activities, argued that the surplus funds were temporarily invested in FDRs and later utilized for business expansion. The Appellate Authority and the Tribunal had previously ruled in favor of the assessee, treating the interest as business income, citing several precedents. They reasoned that the interest earned was a systematic and organized course of activity in the course of carrying on business, and thus should be considered business income.

However, the department contended that the interest income from surplus funds, even if subsequently used for business, should be classified as income from other sources. The department relied on recent judgments, including Totgar's Co-operative Sale Society Ltd v. Income-Tax Officer and Commissioner of Income-Tax v. Mereena Creations, which held that interest on surplus funds not immediately required for business purposes should be treated as income from other sources.

The court, after considering the arguments and precedents, concluded that the interest on FDRs could not be treated as business income. It emphasized that the funds invested in FDRs were not immediately required for business purposes, and the interest earned was not attributable to the business activities of the assessee. Thus, the interest income should be classified as income from other sources.

2. Legality of Allowing Deductions under Section 32AB:
The second issue pertained to whether deductions under Section 32AB of the Income Tax Act could be allowed out of the interest income earned on FDRs. The Tribunal had allowed such deductions, treating the interest as business income. However, given the court's decision on the first issue, it held that the interest income should be classified as income from other sources. Consequently, the deductions under Section 32AB were not applicable.

The court upheld the Assessing Officer's decision to disallow the deductions under Section 32AB, as the interest income was correctly treated as income from other sources.

Conclusion:
The court ruled in favor of the department on both issues. It held that the interest income from FDRs should be classified as income from other sources, not business income. Consequently, deductions under Section 32AB were not applicable to the interest income. The appeal was allowed, and the decisions of the lower authorities were overturned.