The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) has held that interest income earned on Fixed Deposit (FD) kept as security for performance guarantee is taxable as business income Can be set off against project expenses.
NCML Varanasi Private Limited, the assesses are resident corporate entities and are wholly owned subsidiaries of National Commodities Management Services Ltd. (NCML). Both the assesses have entered into a concession agreement with the Food Corporation of India (FCI) for the construction, operation and maintenance of the Silo Complex for storage of food grain on behalf of FCI at Varanasi and Bhattu under design, build, finance, own and operate model for a period of 30 years.
In terms of the concession agreements, the assessees have to construct Silo Complex within a specified period from the date of signing of the concession agreements. For the assessment year under dispute, the assessees filed their return of income declaring NIL income and claiming a refund of the tax deducted at source (TDS). While processing the return of income, the Centralised Processing Centre (CPC), Bangalore rejected the assessee’s claim for refund citing a mismatch between the return of income and Form 26AS.
Shri Saktijit Dey, Judicial Memberthat both the assesseeshave entered into concession agreements with FCI for the construction, operation and maintenance of the Silo Complex. In terms of the concession agreements, the assessees are required to furnish bank guarantees for which the concerned banks have kept securities by way of fixed deposits. It cannot be denied that the fixed deposits kept with banks are in connection with the business activity of the assessee.
It was observed that the interest income earned by the assessee has to be treated as income from business and can be set off against the cost of construction. There is no doubt that the interest income pertained to the impugned assessment year and the concerned banks have deducted tax at source while crediting the interest income to the account of the assessee. The departmental authorities have rejected to grant a refund of the TDS amount as the interest income has been adjusted against the construction expenses.
In the case of CIT vs. Jaypee DSC Ventures Ltd, it was held that “the interest income earned on fixed deposits kept as security for performance guarantee is taxable as business income and can be set off against project expenses.” In light of the above-said decision, the Tribunal directed the Assessing Officer to refund the TDS amount to the assessees and allowed the appeal of the assessee.
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