Interest income on FDRS of surplus funds held as business income not income from other sources

Interest income on fixed deposits of the surplus funds put in FDRs cannot be treated as business income but income from other sources – ITAT

In a recent judgment, ITAT Interest income on fixed deposits of the surplus funds put in FDRs cannot be treated as business income but income from other sources.

ABCAUS Case Law Citation:
ABCAUS 3923 (2024) (03) ITAT

Important Case Laws relied upon:
Tuticorin Alkali Chemicals and Fertilizers Ltd reported in 227 ITR 172 (SC)

In the instant case, the Revenue against the order passed by the CIT(A) in treating the interest income as business income.

The respondent assessee was a private limited company engaged in the business of Real Estate. It filed its return of income for the Assessment Year under consideration admitting a loss under the regular provisions of the Act and taxable income under deeming provisions of section 115JB of the Income Tax Act, 1961 (the Act).

The case was selected for scrutiny under CASS. Accordingly, notices u/s 143(2) and 142(1) of the Act were issued.  Thereafter, the Assessing Officer (AO) issued show cause notices seeking the assessee’s objection on the proposal of estimation of assessee’s business income at 8% on gross receipts, net of all related expenses and allowable deductions. The AO also proposed that the interest income received on deposits held in various banks would be reduced from the gross receipts for the purpose of estimation of business income and the same would be treated as income from other sources without allowing any allowances / deductions therefrom.

After considering the submissions of the assessee and the material available on record, the AO passed the assessment order u/s. 143(3) of the Act making two additions viz. business income estimated at 5% of gross receipts and secondly for Interest income received on FDs treating it as income from other sources.

Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) who partly allowed the appeal of the assessee.

Before the Tribunal, the Revenue took the ground that CIT(A) failed in treating the interest income as business income without appreciating the fact that it had not been brought on record by the assessee that the surplus funds were put in FDRs on account of commercial expediency. Since the funds were not required at the relevant point of time in construction activities, the same were parked with bank to earn interest. Therefore, the interest earned on surplus funds parked with bank is not inextricably linked with the business activity of the assessee. Therefore, the interest earned by assessee cannot be treated as business income and same had been rightly treated as income from other sources by the AO.

The Tribunal noted that it was an admitted fact that the assessee had earned interest on the Fixed Deposits by depositing surplus funds in order to earn income out of the surplus funds. The Tribunal found that the AO by following the ratio laid down by the Hon’ble Supreme Court had held that the interest income shall be treated as income from other sources.

The Tribunal opined that since there was no representation from the assessee to substantiate the treatment of interest income as business, the assessee appeared to not to have any valid explanation.

Accordingly, the Tribunal upheld the order of the AO and set -aside the order of the CIT(A).

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