2020 (4) TMI 538 - AT - Income Tax

Correct head of income - Interest income assessment - under the head income from other sources OR business income - proof of necessary nexus with assessee's business - HELD THAT - In the instant case, we find that FDR s were placed with PNB under its lien for providing necessary margins for the purposes of obtaining the bank guarantees which were required to be placed with the awarder of the contracts to the assessee and issued by the PNB. There exist a direct nexus between pledging of FDRs with bank and seeking bank guarantee for the purposes of assessee s business. Some of the FDRs were directly placed with Chief Engineer, PWD, Jaipur by way of security towards performance of contract obligations. Following the ratio laid down in case of M/s Choudhary Brothers 2018 (10) TMI 1226 - RAJASTHAN HIGH COURT obtaining and pledging the FDR for the purposes of obtaining bank guarantee for the purposes of its business, the assessee has thus established the necessary nexus with his business and interest earned from such FDRs cannot be treated as income from other sources and would rather be treated an income earned from business. - Decided in favour of assessee.

Summary

Issues:
- Appeal against assessment orders for the assessment years 2011-12 & 2014-15
- Treatment of interest income under the head "Income from other sources"
- Nexus between interest income on FDRs and business activities
- Reopening of proceedings under section 148 of the Act

Analysis:

Issue 1: Appeal against assessment orders
- Two appeals filed by the assessee against orders of CIT(A) for the assessment years 2011-12 & 2014-15 were heard together.
- The lead case was taken for discussions, and the assessee did not press ground nos. 1 and 2 of the appeal.

Issue 2: Treatment of interest income
- The Assessing Officer observed interest income in the assessee's proprietorship concerns and questioned its classification.
- Assessee argued that interest income was linked to business activities, not separate income.
- The AO treated the interest income as "Income from other sources" under section 56 of the Act.
- Assessee contended that interest income was part of business income, supported by past assessments and business practices.
- CIT(A) sustained the addition, stating no proof of the nexus between deposits and contract income.
- Assessee cited past assessments, High Court decisions, and business practices to support the business income classification.
- Tribunal referred to a High Court decision supporting the nexus between FDRs and business activities, allowing the appeal partly.

Issue 3: Nexus between interest income and business activities
- High Court decision highlighted the integral link between FDRs, bank guarantees, and business operations.
- Tribunal agreed with the assessee's contentions, allowing the appeal on the grounds of business income classification.
- Similar contentions in another appeal for A.Y 2011-12 led to the same decision in favor of the assessee.

Issue 4: Reopening of proceedings
- Ground challenging the reopening of proceedings became academic due to findings on merit and was dismissed as infructuous.
- The appeal of the assessee was allowed based on the decisions made regarding interest income classification.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeals partly based on the nexus established between interest income on FDRs and the business activities. The High Court decision and past assessments supported the classification of interest income as part of business income, not income from other sources. The issue of reopening proceedings became irrelevant in light of the main findings.