Case Law Details
DNS Financial Services Vs DCIT (ITAT Bangalore)
Bangalore ITAT: Interest on Fixed Deposit Taxable Only in Hands of Real Owner of Funds; Mere Reflection in Form 26AS Not Conclusive
The Bangalore ITAT held that interest credited on a fixed deposit cannot be taxed merely because it appears in the assessee’s Form 26AS, if the assessee establishes that the underlying funds actually belong to another person. The assessee had entered into an arrangement with Vihaan Direct Selling (India) Pvt. Ltd. for managing collections and disbursements on its behalf. Due to regulatory action against Vihaan, the bank account containing Vihaan’s funds was frozen and the balance was converted into a fixed deposit. Since the account stood in the assessee’s name, the bank credited the interest and deducted tax under the assessee’s PAN, leading the Assessing Officer to tax the interest in the assessee’s hands.
The Tribunal observed that the assessee had produced the underlying agreement with Vihaan, ledger accounts, and other records indicating that the funds lying in the bank account represented amounts payable to Vihaan and that the assessee had merely acted as a service provider for a fee. It further noted that the ledger account reflected a corresponding liability in favour of Vihaan broadly matching the amount placed in the fixed deposit, lending support to the assessee’s contention that the beneficial ownership of the funds was not with it.
Holding that taxability depends upon the real ownership of the funds and not merely upon the name in which the bank account or Form 26AS stands, the Tribunal restored the matter to the Assessing Officer. It directed that if, upon verification, the assessee establishes that the fixed deposit represented Vihaan’s money, the interest shall be assessed in the hands of Vihaan and not in the hands of the assessee. However, if the assessee fails to substantiate its claim, the addition made by the Assessing Officer would stand. Accordingly, the appeals for both assessment years were allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. ITA Nos. 1708 & 1709/Bang/2025 for Assessment Year 2018-19 and 2019-20 filed by M/s. DNS Financial Services (the Assessee/Appellant) against the Appellate Order passed by the Commissioner of Income Tax (Appeals) — 11, Bengaluru (the Ld. CIT(A)) dated 23.05.2025 wherein the Appeals filed by the Assessee against the Assessment Orders passed by the DCIT, Central Circle 1(1), Bengaluru for both these Assessment Years dated 30.09.2021 and 15.04.2021 were dismissed.
2. For Assessment Year 2018-19, the Assessee is aggrieved with the addition of Rs. 19,81,374/- added as an income of the Assessee on account of the fixed deposit interest earned by the Assessee.
3. Briefly stated the facts for Assessment Year 2018-19 shows that Assessee is engaged in the business of earning interest income from loans and advances, filed its return of income on 30.08.2018 at a total income of Rs. 39,93,510/-. The case was selected for scrutiny, and necessary notices were issued in time. The Assessee was found to be owner of a fixed deposit with Indian Overseas Bank of Rs. 1,04,36,358/-. The bank has deducted tax at source of Rs. 2,39,064/- against the interest credit of Rs. 19,81,374/- as per Form No. 26. This interest income is not disclosed by the Assessee in the return of income and therefore the Assessee was asked to show cause why the amount should not be taxed in the hands of the Assessee.
4. The Assessee replied that fixed deposit held with Indian Overseas Bank is not the money belonging to the Assessee but money belonging to Vihaan Direct Selling (India) Private Limited [Vihaan] and since the account is frozen by the Bank interest is paid on such balances in the account of that entity. However, the said interest or the fixed deposit is not owned by the Assessee and therefore same cannot be taxed in the hands of the Assessee. The Ld. Assessing Officer rejected the contention of the Assessee and asked to explain the transaction with Vihaan Direct Selling (India) Private Limited. The Assessee explained that Assessee had entered into an arrangement with Vihaan Direct Selling (India) Private Limited who was engaged into multi-level marketing business catering into various customers to provide services relating to management of collection of money and disbursement to suppliers. The Assessee was appointed as an agent for a fee with services. The Assessee has offered its service fee as its income. However, there were certain issues of regulation with Vihaan Direct Selling (India) Private Limited and Government of Maharashtra and thus the bank account of the firm was frozen. The money lying in that bank account is pertaining to Vihaan and interest income earned is also of that entity and therefore same is neither income of the Assessee nor interest income can be taxed in the hands of the Assessee.
5. The Ld. Assessing Officer rejected the contention of the Assessee. He held that the Assessee has not explained why the business transactions of the Assessee with Vihaan are deposited in a term deposit account instead of a current account. The Assessee received the amount pertaining to the other entity into a term deposit account clearly shows that the primary motive of the person to deposit the amount is to earn a fixed rate of interest. It was stated that amount deposited is Rs. 1,04,36,358/- on which the interest is earned and therefore the Ld. Assessing Officer made an addition of Rs. 19,81,374/- being the interest income of the Assessee out of the above transaction.
6. The Assessment Order was passed u/s. 143(3) of the Act on 15.04.2021.
7. Aggrieved with the same, the Assessee preferred an Appeal before the Ld. CIT(A) wherein the Assessee reiterated the same facts. However, the Ld. CIT(A) rejected the contention of the Assessee. He held that the same belongs to Vihaan are unsubstantiated as the Assessee has to inform the bank account details of Vihaan to enable the incoming payments. The Assessee was also required to transfer the amount to the account of Vihaan. Meanwhile, the account was frozen by the Government Authorities and Assessee earned interest thereon which was disclosed in form no. 26AS and therefore the Appeal of the Assessee was dismissed.
8. For Assessment Year 2019-20, the issue is similar. The addition relates to interest earned on the fixed deposit, which was also confirmed by the Ld. CIT(A) by a consolidated order covering both assessment years.
9. The issue for consideration is whether the interest earned on the fixed deposits is taxable in the hands of the Assessee. The learned authorised representative submitted that the fixed deposits and the interest earned thereon belonged to Vihaan Direct Selling (India) Private Limited and not to the Assessee. He further submitted that the Assessee was only acting under an arrangement with Vihaan and relied on the relevant agreement and account copies placed in the paper book. Therefore, merely because the interest was reflected in Form 26AS in the Assessee’s name, it could not be taxed in the Assessee’s hands if the underlying funds did not belong to it.
10. We have carefully considered the rival submissions and perused the orders of the lower authorities.
11. The Assessee is engaged in financial services, including earning income from loans and advances, and has offered its business income accordingly. During assessment, the Assessing Officer noticed that interest income from a fixed deposit, reflected in Form 26AS, had not been offered to tax. The bank later revised the interest figure.
12. The Assessee explained that, under a 2013 arrangement with Vihaan Direct Selling (India) Private Limited, it managed collections and disbursements on behalf of Vihaan for a service fee. A designated Indian Overseas Bank account was maintained for this purpose. According to the Assessee, the funds in that account belonged to Vihaan and were to be used only as directed by Vihaan. Owing to regulatory action concerning Vihaan’s multi-level marketing operations, the account was frozen and the funds were placed in a fixed deposit. Since the account stood in the Assessee’s name, the bank credited the interest and deducted tax under the Assessee’s PAN; however, the Assessee claimed that the interest also belonged to Vihaan and therefore was not taxable in its hands. The Assessee relied on the agreement and ledger account of Vihaan, which showed amounts payable by the Assessee to Vihaan.
13. On careful consideration of the agreement, the ledger account of Vihaan in the Assessee’s books, and the balance standing to the credit of the Indian Overseas Bank account from which the fixed deposit was created, it is evident that the transaction with Vihaan resulted in both the bank balance and a corresponding liability payable by the Assessee to Vihaan. The bank account reflects a fixed deposit of 21,05,00,000, and the ledger account of Vihaan in the Assessee’s books also shows’ similar amount payable by the Assessee to Vihaan.
14. On these facts, the matter is restored to the file of the Assessing Officer. The Assessee shall establish that the funds belonged to Vihaan and not to it. If the Assessing Officer finds that the funds belonged to Vihaan, the interest income shall be taxed in Vihaan’s hands and not in the hands of the Assessee. If the Assessee fails to establish this, the addition made by the Assessing Officer shall stand.
15. Accordingly, both appeals filed by the Assessee are allowed for statistical purposes, as indicated above.
Order pronounced in the open court on 14th July, 2026.
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