The Delhi High Court ruled that the interest earned on Fixed Deposits maintained with a bank for availing credit facility could not be treated as business income and is not entitled to deduction.
The revenue has challenged the common order passed by the Income Tax Appellate Tribunal concerning assessment years 2012-2013 and 2013-2014, respectively wherein the tribunal set aside two separate but similar orders passed by the Principal Commissioner of Income Tax in the exercise of his powers under Section 263 of the Income Tax Act, 1961.
The PCIT has, via his orders, interfered with the assessment orders passed by the assessing officer concerning the respondent/assessee, Brahma Centre Development Pvt. Ltd. pertaining to AYs 2012-2013 and 2013-2014 respectively. The assessment orders were passed under Section 143(3) read with Section 144C of the Act, although, in the opening sheet of the assessment order concerning AY 2013-2014, there is only a reference to Section 143(3) of the Act. The record also shows that, after the PCIT had passed the order insofar as AY 2013-2014 is concerned, the AO as directed, passed a fresh order under Section 143(3) of the Act by conducting “proper enquiries”.
The reason why the PCIT had interfered with the original assessment orders was on account of a view held by him that interest earned by the assessee against fixed deposits was adjusted, i.e., deducted from the value of the inventory and not credited to the Profit and Loss Account. The PCIT noted that the tax auditor, in the report filed in Form 3CD, had observed that interest earned on fixed deposits pertained to “other income” and had not been credited to the P&L account. The interest earned on fixed deposits in AY 2012-2013 was Rs.9,47,04,585/- whereas in AY 2013-2014, the interest earned on fixed deposits was Rs.4,32,91,517/-
Advocate Vibhooti Malhotra on behalf of the appellant revenue urged that the Tribunal failed to appreciate the judgements in which Courts have held that, interest earned from fixed deposits, inter alia, kept as margin money or security for a bank guarantee to avail credit facility for export business, had to be treated as income from other sources and not business income since it did not have any nexus with business.
On the other hand, Ms. Jha on behalf of the assessee contended that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could not have been invoked by the PCIT to interfere with the assessment orders, as said provisions did not have retrospective effect.
Ms Jha further added that even if one were to assume for a moment that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could be applied to the assessee‟s case concerning AYs 2012-2013 and 2013-14, a close perusal of the assessment orders and the record, which was examined by the Tribunal, would show that the AO had made enquiries with regard to interest earned on fixed deposits by the assessee, and it was only after he was satisfied, that it had nexus with the real estate business undertaken by the assessee, that the adjustment/ deduction made by the assessee was left undisturbed.
The division bench of Justice Rajiv Shakdher and Justice Talwant Singh opined that since the Tribunal has returned a finding of fact that there was indeed an enquiry carried out by the so as to the nexus between the funds invested in fixed deposits (on which interest was earned) and the real estate project undertaken by the assessee, no interference is called for by the Court.
The Court said that the subsistence of the expression “derived from” in Sections 80HHC and 80IC of the Act, and second, there was no finding of fact concerning nexus between the business and the funds received on which interest was earned by the assessee.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.
