Interest on FDR pledged as security to obtain contract held as business income

Interest on FDR pledged as security for obtaining contract is business income and profits to be computed by applying NP rate

ABCAUS Case Law Citation:
ABCAUS 3334 (2020) (07) ITAT

In the instant case the appeal was filed by the assessee against the orders passed by CIT(A) in holding interest income on securities as income from other sources instead of business income.

The case of the assessee was that interest income on FDR’s pledged for security purposes in obtaining the contract business comes within the ambit of business income.

Before the Tribunal, the assessee filed an application for acceptance of additional evidence in the form of bank certificate, details of FDRs and copies of bank guarantee.

However, the Revenue. Objected to filing of additional evidences,more particularly, the copies of bank guarantees and submitted that these are in the nature  of  performance  bank  guarantee  issued  by  the bank,  for  which  the expenses  have  already  been  debited  to  the  profit  & loss  account  by  the assessee. 

The  contention  of  the  assessee  in rebuttal was that performance guarantee were issued by the banks on the  basis of FDRs deposited by the assessee and therefore, the interest income received by the assessee on such FDRs were intrinsically connected with the business of the assessee, as  deposit of FDRs/ other securities were prerequisite condition of the bank for issuance of  Performance guarantees.

The Tribunal while admitting the documents stated that the purpose of Tax adjudication is to tax correct taxable income and is not adversial litigation.

Interest on FDR pledged as security for obtaining contract held as business income

The Tribunal opined that the said documents were required to be admitted as additional evidence in support of claim of the assessee that the interest income earned on the FDRs is intrinsically related to the business of the assessee and it was necessary for issuance of performance guarantees by the banks to the third parties.

The assessee submitted that the Tribunal in his own case in the previous year had allowed the interest income as business income and had not separately added the same to the total income of the assessee.

The assessee submitted that whether the income earned by assessee on FDRs was related to the business of the assessee or not and other facts were required to be examined by the authorities below or by the Tribunal.

In view of that the documents were many and the hearing was on virtual platform and therefore, the detailed examination of the documents at the stage of Tribunal was not possible, the issue was remanded to the file of CIT(A).

The CIT(A) was directed to examine the documents in accordance with law and to find out whether the interest earned by the assessee on FDRs was intrinsically related to the business of the assessee or not.

The Tribunal further directed that if it was found on examination that the interest income was related to the business of the assessee, the same may be considered as business income and accordingly the income of the assessee is computed by applying the NP rate.

Download Full Judgment Click Here >>

• Object of assessment proceedings is not to find empirically correct solution on every fact issue – HC
• Penalty u/s 270A deleted as assessee filed revised computation during scrutiny
• Penalty u/s 271B for unfilled column 40 in Tax Audit Report Form 3CD deleted by ITAT
• Merely ex-parte rectifying computation without amending assessment order not make it nullity- ITAT
• Once assessee discharges primary onus, it shifts to AO to bring evidence to contrary – ITAT