2016 (4) TMI 1391 - AT - Income Tax

Correct head of Income - FD interest - business income or income from other sources - HELD THAT - Not in dispute that the assessee had to invest funds in fixed deposits and offered them as security for the overdraft facilities it received from banks. In the case of Indo Swiss Jewels Ltd. 2005 (9) TMI 47 - BOMBAY HIGH COURT had held that where interest is earned on inter corporate deposits made from surplus funds which are set apart for payment of imported machinery, the said interest income has to be assessed as business income. In the case of Koshika Telecom Ltd. 2006 (2) TMI 140 - DELHI HIGH COURT has taken the view that where deposit of margin money by an assessee with a bank was linked with the furnishing of bank guarantee to be given to the Department of Telecommunications, for obtaining a licence by an assessee who was in the business of telecommunication, the same has to be treated as business income. In the case of Commissioner Of Income-Tax v. Lok Holdings 2008 (1) TMI 365 - BOMBAY HIGH COURT held that money received by a property developer from prospective purchases during the progress of construction and where such funds were deposited by an assessee with the bank, interest earned on such deposits was held to have arisen out of business activity and, therefore, the same had to be construed as income from business. In view of the above, we are of the view that the order of CIT(A) holding that the interest income is income from business has to be upheld. - Decided in favour of assessee.

Summary

Issues:
1. Classification of FD interest as business income or income from other sources.

Analysis:
The appeal was filed by the Revenue against the order of CIT(A)-XXIV, Kolkata regarding the assessment year 2009-10. The primary issue was the treatment of Fixed Deposit (FD) interest of ?87,54,636/- earned by the Assessee company engaged in manufacturing machinery. The Assessing Officer (AO) considered the interest income as income from other sources, not connected to the business. The AO determined the income of the Assessee accordingly. The Assessee contended before the CIT(A) that the interest income was connected to its business as the FDs were maintained as security for overdraft facilities used in business operations. The Assessee relied on various judicial precedents to support its argument that interest income connected to business activities should be assessed as business income. The CIT(A) agreed with the Assessee's contention, emphasizing the connection between the FDs and business activities. The CIT(A) directed the AO to treat the interest income as business income, not income from other sources.

The Revenue, aggrieved by the CIT(A) order, appealed before the Tribunal. The Revenue argued that there was no business compulsion for the Assessee to invest in FDs and that the interest income should be categorized as income from other sources. However, the Tribunal disagreed with the Revenue's stance. The Tribunal noted that the Assessee had invested in FDs to secure overdraft facilities for business purposes. Citing relevant precedents, including decisions by the Bombay High Court and Delhi High Court, the Tribunal held that interest earned on funds invested for business activities should be treated as business income. The Tribunal upheld the CIT(A) order, dismissing the Revenue's appeal.

Additionally, the Assessee invoked the rule of consistency, highlighting that interest income for other assessment years had been treated as business income by the AO. Referring to a decision of the Calcutta High Court, the Tribunal upheld the CIT(A) order based on the application of the rule of consistency. The Tribunal dismissed the appeal of the Revenue and the Cross Objection of the Assessee, which was not pressed during the hearing. Consequently, the Tribunal upheld the treatment of FD interest as business income, in line with the Assessee's contentions and previous consistent assessments.