2024 (8) TMI 755 - AT - Income Tax

Addition made on account of interest income received on fixed deposits - netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work-in- progress - CIT(A) deleted addition - HELD THAT - CIT(A) for the year under consideration and for the earlier year has held the interest earned out of fixed deposit to be a capital receipt which was capitalized and reduced from WIP. The coordinate bench for A.Y. 2014-15 upheld the order of the ld. CIT(A) by holding that the fixed deposits was created as margin for availing bank loan which was utilized for the business of the assessee, thereby establishing a nexus between the interest earned out of the FD with the business of the assessee and further held that the interest income was rightly netted off with the interest expenditure claimed by the assessee. The co-ordinate bench had relied on various decisions of the Hon'ble High Court and the Tribunal which held that the interest income out of such fund are to be treated as business income and not income from other sources . A.O. has failed to corroborate the fact that the FD made by the assessee is out of the surplus funds held by the assessee in a case where the assessee has borrowed huge advances from banks and has also availed over draft facility for the purpose of its business resultantly expending higher rate of interest than that received out of the FD. Assessee has established that the said funds were incidental to the assessee s business activity and, therefore, the same cannot be said to be income from other sources - no infirmity in the order of the ld. CIT(A) - Decided against revenue.

Summary

Issues:
Challenge to deletion of addition on interest income received on fixed deposits and netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work-in-progress.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2015-16, which deleted the addition made on interest income received on fixed deposits and netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work-in-progress. The Assessing Officer had determined a total loss after making additions on interest income and delayed deposits of employees' contribution to PF. The first appellate authority deleted the addition on interest income, citing that the fixed deposits were not out of surplus funds, which was upheld by the Tribunal for the previous year. The Revenue challenged this decision.

During the proceedings, the Authorized Representative for the assessee argued that the fixed deposits were made for banking requirements and had a direct nexus to the business activities. The Departmental Representative, however, contested these facts and supported the Assessing Officer's order. The Tribunal noted that the interest income from fixed deposits was netted off against interest expenditure on bank overdraft and term loans. The Assessing Officer raised concerns regarding interest-free loans to related parties and disallowed the netting off, reducing the inventory in work-in-progress and making an addition on the interest income.

The Tribunal observed that the interest earned from fixed deposits was treated as a capital receipt and reduced from work-in-progress, establishing a nexus with the business activities. It was held that the interest income was rightly netted off with interest expenditure. The Tribunal relied on previous decisions to support treating the interest income as business income. It was noted that the Assessing Officer failed to prove that the fixed deposits were from surplus funds, considering the substantial borrowings and overdraft facility utilized for business purposes. The Tribunal found no fault in the Commissioner's order and dismissed the Revenue's appeal.

In conclusion, the Tribunal upheld the Commissioner's decision to delete the addition on interest income and affirmed the netting off of interest receipts with interest expenditure, considering the nexus between the fixed deposits and the business activities. The appeal filed by the Revenue was dismissed.