Head of Income Can Interest Income on Fixed Deposits be Claimed Under the Head Income from Business?

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The Tax Publishers Income Tax--Head of Income Can Interest Income on Fixed Deposits be Claimed Under the Head Income from Business? Akhilesh Kumar Sah Income accruing to an assessee has to be shown in any one of the five heads prescribed under the Income Tax Act and the respective head of income has its own workings. The interest income earned by an assessee is shown sometimes under the head 'Business' Income while usually it is shown as Income from other Sources in respect of which controversy rises and the Revenue takes its beneficial stand. 1. Introduction The origin and purpose of income should be taken into consideration while charging income to tax under the given heads of income. 2. Analysis Recently, in DCIT v. Evita Construction Pvt. Ltd. [ITA No 3914/Mum/2023 (AY:2015-16)] decided by ITAT, Mumbai on 12-8-2024, in deleting the addition made on account of interest income received on fixed deposits amounting to Rs.1,87,44,483 and netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work-in-progress (for short, WIP). Assessee company, being engaged in the real estate business of development and construction of residential and commercial premises, filed its return of income, declaring loss of Rs.4,84,78,892. Assessee's case was selected for limited scrutiny and notice under section(s) 143(2) and 142(1) of the Income Tax Act, 1961 (for short, the Act) were duly issued and served upon assessee for the purpose of verifying the interest income received out of the fixed deposits which had not been offered to tax by the assessee in its return of income. AO had passed the assessment order under section 143(3) of the Act whereby the total loss was determined at Rs.2,94,97,640 after making an addition on the interest income amounting to Rs.1,87,44,483 and addition under section 36(1)(va) read with section 2(24)(x) of the Act amounting to Rs.2,36,769 on the delayed deposits of employees contribution to PF. Assessee filed appeal before the first Appellate Authority, who deleted the addition made by AO on the interest income received out of the fixed deposits on the ground that the said fixed deposits was not out of the surplus fund. Revenue filed appeal before ITAT challenging the order of the CIT(A). 3. Submissions of assessee AR contended that assessee company had a total term loan of Rs.675.81 Crores and had also availed bank over draft facility against such fixed deposit for the purpose of the banking requirements during the year under consideration. AR stated that the interest on bank over draft was more than the interest received on fixed deposits by 1% and the term loan was also at a higher interest rate than that of the bank over draft facility. AR contended that the fixed deposits were made only for the purpose of banking requirements where the promoter's contribution for the business was a requirement and the fixed deposits were not out of the surplus funds and was only an arrangement for availing banking facility. AR stated that the interest out of the said fixed deposits had direct nexus to the business of assessee and that assessee had rightly netted off the interest income with the interest expenses during the year under consideration. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Head of Income

Can Interest Income on Fixed Deposits be Claimed Under the Head Income from Business?

Akhilesh Kumar Sah

Income accruing to an assessee has to be shown in any one of the five heads prescribed under the Income Tax Act and the respective head of income has its own workings. The interest income earned by an assessee is shown sometimes under the head 'Business' Income while usually it is shown as Income from other Sources in respect of which controversy rises and the Revenue takes its beneficial stand.

1. Introduction

The origin and purpose of income should be taken into consideration while charging income to tax under the given heads of income.

2. Analysis

Recently, in DCIT v. Evita Construction Pvt. Ltd. [ITA No 3914/Mum/2023 (AY:2015-16)] decided by ITAT, Mumbai on 12-8-2024, in deleting the addition made on account of interest income received on fixed deposits amounting to Rs.1,87,44,483 and netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work-in-progress (for short, WIP).

Assessee company, being engaged in the real estate business of development and construction of residential and commercial premises, filed its return of income, declaring loss of Rs.4,84,78,892. Assessee's case was selected for limited scrutiny and notice under section(s) 143(2) and 142(1) of the Income Tax Act, 1961 (for short, the Act) were duly issued and served upon assessee for the purpose of verifying the interest income received out of the fixed deposits which had not been offered to tax by the assessee in its return of income. AO had passed the assessment order under section 143(3) of the Act whereby the total loss was determined at Rs.2,94,97,640 after making an addition on the interest income amounting to Rs.1,87,44,483 and addition under section 36(1)(va) read with section 2(24)(x) of the Act amounting to Rs.2,36,769 on the delayed deposits of employees contribution to PF. Assessee filed appeal before the first Appellate Authority, who deleted the addition made by AO on the interest income received out of the fixed deposits on the ground that the said fixed deposits was not out of the surplus fund. Revenue filed appeal before ITAT challenging the order of the CIT(A).

3. Submissions of assessee

AR contended that assessee company had a total term loan of Rs.675.81 Crores and had also availed bank over draft facility against such fixed deposit for the purpose of the banking requirements during the year under consideration. AR stated that the interest on bank over draft was more than the interest received on fixed deposits by 1% and the term loan was also at a higher interest rate than that of the bank over draft facility. AR contended that the fixed deposits were made only for the purpose of banking requirements where the promoter's contribution for the business was a requirement and the fixed deposits were not out of the surplus funds and was only an arrangement for availing banking facility. AR stated that the interest out of the said fixed deposits had direct nexus to the business of assessee and that assessee had rightly netted off the interest income with the interest expenses during the year under consideration.