2018 (12) TMI 1150 - HC - Income Tax

Interest income earned from the fixed deposits for opening the letter of credits and for retention of margin money - income from other sources OR profits and gains of business - Held that - The deposits made are in pursuance of the contract and but for the contract, there was no warrant for making the deposits or earning income by way of interest. As we already stated, the deposit and the income generated by way of interest, are intrinsically connected with the contract, the business engaged in by the assessee. It can only be income derived from profits and gains of the business. We hence answer the first question in favour of the assessee and against the Revenue. Whether assessee is entitled to set off the un-absorbed depreciation against the income from other sources ? - Held that - The second question requires no answer at our hands for it being a settled position that there could be no depreciation claimed as against income from other sources. This will have no effect in the case of the assessee insofar as the first question being answered in their favour.

Summary

Issues:
I) Determination of interest income earned by the assessee from fixed deposits for opening letter of credits and retention of margin money as income from other sources or profits and gains of business.
II) Entitlement of the assessee to set off un-absorbed depreciation against income from other sources.

Analysis:
1. The case involved the assessment of interest income earned by a ship building company from fixed deposits made for opening letter of credits and retention of margin money. The company claimed the interest income as profits and gains of business, while the Department argued it should be treated as income from other sources.
2. The Tribunal was tasked with deciding whether the interest income could be classified as profits and gains of business or income from other sources. The assessee relied on a previous decision while the Revenue cited relevant case laws to support their argument.
3. The Court considered precedents such as Tuticorin Alkali Chemicals and Fertilizers Ltd. and Pandian Chemicals Ltd. to analyze the nature of income derived from specific activities like deposits made for opening letter of credits.
4. The Court distinguished the present case from previous judgments like K.Ravindranathan Nair, emphasizing the intrinsic connection between the deposits made and the contracts entered into by the assessee.
5. Referring to Govinda Choudhury, the Court highlighted that interest income attributable to business activities should be assessed as profits and gains of business, rather than income from other sources.
6. Ultimately, the Court ruled in favor of the assessee, determining that the interest income earned from the specific activities in question was derived from profits and gains of the business. Consequently, the assessee was not entitled to set off un-absorbed depreciation against income from other sources. The appeal was rejected with no order as to costs.