2011 (1) TMI 1169 - HC - Income Tax

Whether income derived out of the Fixed Deposits kept in the bank to obtain a bank guarantee, constitutes business income and not income from other sources - Held that - investment of amounts in Fixed Deposits by the assessee, was only to secure a bank guarantee to offer it to M/s. KPTCL in order to acquire a contract work, and therefore it cannot be treated as income from other sources and interest accrued on such Fixed Deposits has to be treated as business income only in view of the Judgment of the Apex Court in the case of CIT v. Govinda Choudhury and Sons (1992 - TMI - 5424 - SUPREME Court) , appeal is dismissed.

Summary

Issues:
1. Characterization of income derived from Fixed Deposits for obtaining bank guarantee as business income or income from other sources.

Analysis:
The High Court of Karnataka addressed the issue of whether the income derived from Fixed Deposits kept in the bank to obtain a bank guarantee should be characterized as business income or income from other sources. The appellant, a partnership firm engaged in electrical business, deposited certain amounts in Fixed Deposits to furnish a bank guarantee for their business activities with KPTCL. The Assessing Officer treated the income from these deposits as income from other sources, contrary to the firm's assertion that it should be considered business income. The Tribunal ruled in favor of the assessee, stating that the Fixed Deposits were an integral part of the business activity and the interest earned should be treated as part of the business income. The Tribunal's decision was based on the premise that the bank interest cannot be isolated from the business income. The revenue, dissatisfied with the Tribunal's decision, appealed to the High Court.

In its judgment, the High Court considered a previous decision involving the same assessee in a different year. The Court had held that the investment in Fixed Deposits was solely to secure a bank guarantee for acquiring a contract work, thus categorizing the interest accrued on such deposits as business income. Citing the Apex Court Judgment in the case of CIT v. Govinda Choudhury and Sons, the High Court emphasized that the interest on Fixed Deposits in this context should be treated as business income. The Court found no merit in the revenue's appeal, as the previous decision had already established the principle that such interest should be considered part of the business income. Consequently, the High Court dismissed the appeal, affirming the characterization of the income derived from Fixed Deposits for obtaining a bank guarantee as business income rather than income from other sources.