The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) allowed a deduction under Section 80-IA(4) of the Income Tax Act, 1961, stating that the Fixed Deposit Receipts ( FDRs ) mandated by Punjab National Bank ( PNB ) as a financing requirement for an infrastructure project, were a business necessity.
Kalthia Infra-Con Pvt. Ltd., the assessee is a Special Purpose Vehicle (SPV) set up for infrastructure development under a Build-Operate-Transfer (BOT) model. The assesseee company claimed a deduction of Rs. 20,93,513 under Section 80-IA(4) of the Income Tax Act, 1961, declaring profits from its infrastructure project.
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The assessee earned interest of Rs. 27,83,063 from Fixed Deposit Receipts (FDRs) mandated by Punjab National Bank (PNB) as part of a Debt Service Reserve Account (DSRA) to secure a loan for the project.
The assessing officer (AO) denied the deduction stating that the interest income could not be considered “derived from” the business of infrastructure development but as “income from other sources.”
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] observed that the interest income earned from FDRs could not be classified as “profits derived from” infrastructure development.
Aggrieved, the assessee appealed before the ITAT arguing that the FDRs were not created from surplus or idle funds but were a business requirement under the loan conditions imposed by Punjab National Bank (PNB).
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Further, they argued that the interest income has a direct and immediate nexus with the infrastructure business, as the FDRs were necessary for the loan to be sanctioned and the assessee has no other business or revenue source, reinforcing the direct link between the FDRs and the infrastructure project.
On the contrary, the revenue counsel argued that the loan was not used exclusively for the infrastructure project and included other uses, such as repaying unsecured loans. The revenue relied on the judicial precedent set in the case of Tuticorin Alkali Chemicals, which classified interest from deposits as “income from other sources”. The revenue argued that the FDRs lacked a sufficient nexus with the core business operations to qualify for the deduction.
The two-member bench comprising Suchitra Kamble (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) noted that unlike in the case of Tuticorin Alkali Chemicals, where funds in FDRs were surplus, the assessee’s FDRs were essential for securing the loan and directly tied to the infrastructure project.
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The tribunal observed that the assessee’s audited financials confirmed that the loan secured solely for the infrastructure project, was the only liability, showing no other business involvement or unsecured loans.
The tribunal referenced the Gujarat High Court’s ruling in CIT v. Shah Alloys Ltd. and a similar ITAT decision in Aqualfil Polymers Co. Pvt. Ltd., where interest from FDRs linked to business loans was treated as business income.
Therefore, the tribunal allowed the deduction under Section 80-IA(4) of the Income Tax Act. The assessee’s appeal was allowed.
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