2015 (8) TMI 465 - HC - Income Tax

Income arising out of interest - whether cannot be taken into account for the purpose of giving benefit under section 33AB as held by Tribunal? - Held that - It is not in dispute that the surplus commercial funds available with the company were kept in short- term fixed deposits. The company has borrowed funds for the purpose of carrying on its business. The funds may not always be necessary or may not always be blocked. Therefore, the funds which were surplus at any point of time were fruitfully invested in short-term fixed deposits and the assessee thus earned interest which in a way has reduced its burden on account of interest as would appear from the two figures indicated above. It is, therefore, not possible to hold that the interest earned was not a business income. When the assessee has paid interest of nearly ₹ 2.66 crores and has earned interest of nearly ₹ 1.88 crores, the effective debit on that side is less than ₹ 1 crore. No reason why it can be said that the interest earned by the assessee should not be treated as the business income for the purpose of the benefit under section 33AB. Another reason why the views expressed by the Tribunal cannot be accepted is that the benefit under section 33AB can be obtained provided the assessee has made the deposits with the national bank. Such deposits are not interest-free deposits. Interest also accrues from such deposits. If the intention of the Legislature was that income arising out of interest is to be excluded then a specific provision in that regard would have been made in the section itself. - Decided in favour of the assessee.

Summary

Issues: Interpretation of section 33AB for determining the treatment of interest earned by the assessee for the purpose of benefit under the section.

Analysis:
The judgment in question pertains to an appeal challenging the decision of the Income Tax Appellate Tribunal regarding the treatment of interest earned by the assessee for the purpose of availing benefits under section 33AB. The Tribunal had dismissed the appeal, concurring with the views of the Commissioner of Income-tax (Appeals) and the Assessing Officer that the interest earned should not be considered for the said benefit. The Tribunal relied on the judgment in the case of Pandian Chemicals Ltd. v. CIT, where it was held that for benefits under section 80HH, income arising from interest should not be included as it is related to profits and gains derived from an industrial undertaking.

The appellant argued that the word "derived from" is not used in section 33AB, unlike in section 80HH, and thus, the interpretation should not be based solely on the Pandian Chemicals case. Reference was made to the case of CIT v. Tirupati Woollen Mills Ltd., where interest arising from utilisation of commercial assets was considered as business income. Additionally, the case of Eveready Industries India Ltd. v. CIT was cited, emphasizing that interest earned from short-term deposits made out of business funds should be treated as business income.

The respondent, on the other hand, supported the Tribunal's decision, citing the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, where it was held that income from interest should be classified under "Income from other sources." Section 33AB, according to the respondent, applies only to business income.

Upon evaluating the arguments, the Court found merit in the appellant's contentions. The Court analyzed the balance sheet provided by the appellant, showing interest payments and earnings, indicating that surplus commercial funds were invested in short-term fixed deposits, resulting in reduced interest burden. The Court concluded that the interest earned was indeed business income, as it contributed to reducing the overall interest burden on the company.

The Court rejected the Tribunal's view, emphasizing that section 33AB benefits can be availed if deposits are made with a national bank, and interest accrues from such deposits. The absence of a specific provision excluding interest income from the section led the Court to rule in favor of the assessee, setting aside the Tribunal's decision and allowing the appeal.

In conclusion, the judgment clarifies the interpretation of section 33AB concerning the treatment of interest earned by the assessee, emphasizing that such interest can be considered as business income if it contributes to reducing the interest burden and is not expressly excluded by the legislation.