2016 (7) TMI 1539 - AT - Income Tax

Interest income earned on fixed deposits - correct head of income - Income from other sources or business income - HELD THAT - From the financial statements we notice that the assessee has borrowed loans for executing the project and the amount of loan outstanding as on 31.3.2010 stand at 824.73 crores. The loan taken from banks alone stands at 503.29 crores. The term loans have to be repaid in fixed installments and hence there is merit in the contentions of the assessee that it was constrained to keep the funds in fixed deposits to earn interest which will meet a portion of interest burden of bank loans. We find merit in the contentions of the assessee that it had to keep some surplus funds in hand in order to meet the maintenance requirements of the roads. In these set of facts we are of the view that there were business exigencies in keeping the funds in fixed deposits and hence there is merit in the contentions of the assessee that interest income earned on those fixed deposits is assessable as income from business. In the case of Lok Holdings 2008 (1) TMI 365 - BOMBAY HIGH COURT the assessee therein collected advances from the customers who intended to purchase the flats in the properties as developed by the assessee. Since the construction was going on the surplus funds available with the assessee out of the advances so received was deposited in Fixed deposits. The Hon ble jurisdictional Bombay High Court after considering the decision of Hon ble Supreme Court rendered in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd 1997 (7) TMI 4 - SUPREME COURT held that the interest income is assessable under the head Income from business. - Decided in favour of assessee.

Summary

Issues:
Assessment of interest income from fixed deposits as business income or income from other sources.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai pertained to the assessment year 2010-11, challenging the decision to assess interest income earned on fixed deposits under the head "Income from other sources" instead of as business income. The assessee, engaged in road infrastructure development, argued that the fixed deposits were made from business-generated funds and should be considered business income. The Assessing Officer (AO) and Ld CIT(A) assessed the interest income differently, relying on legal precedents like the Tuticorin Alkali Chemicals case and the Godavari Sugar Mills case. The assessee contended that the deposits were made due to business exigencies, borrowing substantial funds repayable in fixed installments, and for maintaining constructed roads.

The Ld A.R referenced the Lok Holdings case and M/s West Gujarat Expressway Ltd case to support the argument that interest income should be treated as business income. The Ld D.R, however, supported the decision of Ld CIT(A). After considering the financial statements showing significant outstanding loans and business requirements, the Tribunal agreed with the assessee's submissions. It acknowledged the need to earn interest to offset loan burdens and maintain road infrastructure. Citing the Lok Holdings case, the Tribunal found business exigencies in the fixed deposits, aligning with the Bombay High Court's stance that interest income can be assessed under the head "Income from business."

Consequently, the Tribunal set aside Ld CIT(A)'s order and directed the AO to assess the interest income from fixed deposits as business income for the relevant year. The appeal by the assessee was allowed, with the order pronounced on 19.7.2016.