2022 (1) TMI 891 - AT - Income Tax

Correct head of income - assessment of interest income as income from other sources or business income claimed by the assessee - HELD THAT - The decision to invest the idle fund lying with the assessee in fixed deposit has to be accepted as a decision taken by a prudent businessman keeping in view the commercial expediency. It is not disputed that the assessee has temporarily parked its business fund in short term deposits varying between 3-9 months. When the need arises, assessee encashes the fixed deposits and utilises the funds for its business purpose. In the aforesaid scenario. it can not be said that the interest income is not inextricably linked with the business of the assessee. Therefore, in our view, the interest income earned on fixed deposits has to be treated as business income of the assessee. That being the case, it has to be set off against the revenue expenses. However this is only to the extent of interest income earned on fixed deposits. As far as income earned from mutual fund and interest from income tax refund, they have to be taxed under the head income from other sources. Thus allow assessee s claim of assessment of interest income under the head business - Whereas, the balance amount is to be taxed under the head income from other sources. In so far as the issue of set off of income from other sources against the revenue expenses in terms of section 71 of the Income Tax Act, admit the additional grounds as they do not require fresh investigation into facts. However, considering the fact that neither the Assessing Officer nor learned Commissioner (Appeals) have given any conclusive finding on this issue, I restore it to the file of the Assessing Officer for deciding assesee s claim - Appeal of the assessee is partly allowed.

Summary

Issues:
Assessment of interest income as business income vs. income from other sources and allowing set off of revenue expenses against interest income.

Analysis:
The dispute in this case revolves around the classification of interest income earned by the assessee as either business income or income from other sources, along with the issue of allowing set off of revenue expenses against the interest income. The assessee, engaged in construction business, claimed that the interest income from fixed deposits is directly linked to its business activities as the funds were generated from the business and utilized for commercial purposes. The Assessing Officer, however, treated the interest income separately under the head "income from other sources" due to the project completion method followed by the assessee, where no revenue was recognized from business operations in the relevant year. The Commissioner (Appeals) upheld this decision, leading to the appeal before the ITAT.

The ITAT considered the contentions of both parties and the factual position that the fixed deposits were made from surplus funds generated by the construction business. It acknowledged that the interest income earned on these fixed deposits was indeed connected to the business activities of the assessee, as the funds were invested for commercial expediency to reduce project costs. Relying on precedents, including the decision of the Bombay High Court in CIT vs. Lok Holdings, the ITAT concluded that the interest income should be treated as business income to the extent of the amount generated from fixed deposits. However, the portion of interest income from mutual funds and income tax refund was to be taxed under the head "income from other sources."

Regarding the set off of income from other sources against revenue expenses as per section 71 of the Income Tax Act, the ITAT allowed the additional grounds raised by the assessee for consideration, as they did not require fresh investigation into facts. Since no conclusive finding was given by the Assessing Officer or the Commissioner (Appeals) on this issue, the ITAT remanded it back to the Assessing Officer for a decision. Ultimately, the ITAT partly allowed the appeal of the assessee, granting relief on the classification of interest income and directing further assessment on the set off of income from other sources against revenue expenses.

In conclusion, the ITAT's judgment clarified the treatment of interest income from fixed deposits as business income, set specific amounts to be taxed under different heads, and directed a fresh assessment on the set off of income from other sources against revenue expenses, providing partial relief to the assessee.