2015 (1) TMI 108 - HC - Income Tax

Taxability of interest - Income from other sources or not - Whether the Tribunal is right in holding interest of ₹ 9,86,430/arising out of mandatory precondition deposit towards supply of raw material is taxable as income from other sources Held that - Following the decision in EMPIRE PUMPS PVT. LTD. Versus ACIT 2014 (11) TMI 563 - GUJARAT HIGH COURT wherein the judgment of SC in Commissioner of Income-Tax Versus Karnal Co-operative Sugar Mills Ltd. 1999 (4) TMI 7 - SUPREME Court is discussed and held that the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessees agreement with the supplier - It was on the money so deposited that some interest has been earned - This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest thus, the income received thereupon cannot be termed to be income from other sources Decided in favour of assessee.

Summary

Issues:
1. Challenge to the order passed by the Income Tax Appellate Tribunal.
2. Taxability of interest arising from a mandatory precondition deposit towards the supply of raw material.

Analysis:
1. The appellant-assessee challenged the order passed by the Income Tax Appellate Tribunal (ITA) in ITA No.960/RJT/2004, where the Tribunal allowed the appeal preferred by the revenue. The appellant, engaged in the business of Building Ships, filed an appeal against the order of the Assessing Officer under Section 143(3) of the Income Tax Act for the assessment year 1998-99. The Commissioner of Income Tax (CIT) partly allowed the appeal, leading to the revenue filing an appeal before the ITA, which was allowed on 06.02.2006. The substantial question of law formulated by the Court was whether interest of &8377; 9,86,430 arising from a mandatory precondition deposit towards the supply of raw material is taxable as "income from other sources."

2. The appellant contended that the Tribunal erred in reversing the order of the CIT, citing a previous unreported decision of the Court and other allied matters. The Court noted that the interest earned from fixed deposits placed for business purposes cannot be considered income from other sources but must be seen as part of the assessee's business income. Referring to previous decisions, the Court emphasized that interest directly linked to the business should be treated as derived from business income. The Court concluded that the income received by the appellant from the mandatory precondition deposit towards the supply of raw material should not be classified as income from other sources but as part of the business income.

3. The Court highlighted that the interest earned by the appellant was utilized for the purpose of the business by purchasing new machinery, emphasizing the direct nexus between the interest income and the business activities. The decision of the Apex Court in a similar case supported the stance that income earned from fixed deposits placed for business purposes should be considered part of the business income. Consequently, the Court answered the substantial question of law in favor of the assessee and against the revenue, allowing the appeal.

In conclusion, the judgment favored the appellant by establishing that the interest earned from a mandatory precondition deposit towards the supply of raw material should be treated as part of the business income and not as income from other sources. The decision was based on the direct nexus between the interest income and the business activities, as established by previous legal precedents and rulings.