Interest Income Linked to Business, cannot be treated as other income

DCIT Vs Evita Construction Pvt. Limited (ITAT Mumbai)

The case of DCIT Vs Evita Construction Pvt. Limited was heard by the Income Tax Appellate Tribunal (ITAT) Mumbai. This appeal was filed by the Revenue challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)] related to the assessment year 2015-16. The key issue in this case was the deletion of an addition made by the Assessing Officer (AO) regarding the interest income of ₹1,87,44,483 received on fixed deposits and its netting off against interest expenditure capitalized in work-in-progress (WIP).

Evita Construction Pvt. Limited is a company engaged in the real estate business, focusing on the development and construction of residential and commercial premises. The company filed its income tax return for the assessment year 2015-16, declaring a loss of ₹4,84,78,892. During the assessment, the AO added ₹1,87,44,483 as interest income from fixed deposits, which the company had not offered to tax. Additionally, the AO added ₹2,36,769 under Section 36(1)(va) due to delayed deposit of employees’ Provident Fund contributions.

The company appealed to the CIT(A), who deleted the addition made by the AO on the grounds that the fixed deposits were not from surplus funds but were instead linked to business requirements. The CIT(A) noted that a similar decision had been made for the previous assessment year (2014-15), where the Tribunal ruled in favor of the company.

The Revenue challenged this decision, arguing that the fixed deposits should be considered as generating taxable interest income. The Departmental Representative (DR) supported the AO’s findings, stating that the fixed deposits were an independent source of income and should not be netted off against interest expenses.

Upon reviewing the submissions, the ITAT Mumbai upheld the CIT(A)’s decision, agreeing that the fixed deposits were not created from surplus funds but were a requirement for banking facilities. The Tribunal found that the interest earned had a direct nexus with the business activities of the company and thus could be netted off against the interest expenses.

The ITAT also noted that the AO did not provide evidence to show that the fixed deposits were from surplus funds. Given the company’s substantial borrowings and use of overdraft facilities for business purposes, the Tribunal concluded that the interest income could not be treated as “income from other sources.”

The ITAT Mumbai dismissed the Revenue’s appeal, affirming the CIT(A)’s decision to delete the addition of interest income. This case highlights the importance of understanding the nexus between income and business activities in determining tax liability.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been filed by the Revenue, challenging the order of the learned Commissioner of Income Tax (Appeals)-47, Mumbai (‘ld.CIT(A) for short), passed u/s.250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2015-16, in deleting the addition made on account of interest income received on fixed deposits amounting to Rs.1,87,44,483/- and netting off of interest receipt on bank fixed deposits with interest expenditure capitalized in the closing work­in-progress.

2.. The brief facts of the case are that the assessee company is engaged in the real estate business of development and construction of residential and commercial premises and had filed its return of income on 30.09.2015, declaring loss of Rs.4,84,78,892/-. The assessee’s case was selected for limited scrutiny and notice u/s. 143(2) and 142(1) were duly issued and served upon the assessee for the purpose of verifying the interest income received out of the fixed deposits which has not been offered to tax by the assessee in its return of income.

3. The ld. Assessing Officer (‘A.O.’ for short) passed the assessment order u/s.143(3) on 29.12.2017 where the total loss was determined at Rs.2,94,97,640/- after making an addition on the interest income amounting to Rs.1,87,44,483/- and addition u/s. 36(1)(va) w.s. 2(24)(x) of the Act amounting to Rs.2,36,769/- on the delayed deposits of employees contribution to PF.

4. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 01.08.2023 had deleted the addition on the interest income received out of the fixed deposits on the ground that the said fixed deposits was not out of the surplus fund and that the Tribunal has held this in favour of the assessee for A.Y. 2014-15.

5. The Revenue is in appeal before us, challenging the order of the ld.CIT(A) on this ground.

6. The learned Authorised Representative (‘ld. AR’ for short) for the assessee contended that the assessee company had a total term loan of Rs.675.81 crores and had also availed bank over draft facility against such fixed deposit for the purpose of the banking requirements during the year under consideration. The ld. AR further stated that the interest on bank over draft was more than the interest received on fixed deposits by 1% and the term loan is also at a higher interest rate than that of the bank over draft The ld. AR contended that the fixed deposits were made only for the purpose of banking requirements where the promoter’s contribution for the business was a requirement. The ld. AR contended that the fixed deposits are not out of the surplus funds and is only an arrangement for availing banking facility. The ld. AR also stated that the interest out of the said fixed deposits has direct nexus to the business of the assessee and that the assessee had rightly netted off the interest income with the interest expenses during the year under consideration. The ld. AR relied on the various decisions in support of the assessee’s contention.

7. The learned Departmental Representative (‘ld.DR’ for short), on the other hand, controverted the said facts and relied on the order of the ld. A.O.

8. We have heard the rival submissions and perused the materials available on It is observed that during the year under consideration the assessee has shown the interest income out of the fixed deposit aggregating to Rs.1.87 crores and had incurred interest expenditure of Rs .88.19 crores on the bank over draft facility and on the existing term loans. The assessee had netted off the same. The ld. A.O. observed that the assessee has claimed the funds cost of Rs.88.19 crores on interest and other charges on borrowing which was transferred to inventories as WIP. The ld. A.O. also observed that the assessee had advanced interest free loan of Rs.440,31,75,517/- to related parties which according to the ld. A.O. was that the assessee had utilized the interest bearing funds for interest free loans. The assessee’ s contention that the said advances were given to the wholly owned subsidiaries who were the owners of the land which was developed by the assessee company and for which the assessee has extended advances to various vendors, for goods and services in the normal course of business of the project. The assessee contends the same to be for commercial expediency and that the assessee had income from various sources such as share capital, interest free loans from promoters and from sales and that for the said reason the interest bearing funds is not said to be utilized for advancing the interest free funds to its subsidiaries. The assessee reiterated that the borrowed funds were utilized only for the business. The ld. A.O. held that the loan advance by the assessee to its following related parties without charging interest :

aggregating to Rs.2,75,19,95,693/- was not for business exigency for the reason that when the assessee itself was paying interest on the borrowed funds, there is no justification in holding that it had advanced interest free advances to its subsidiaries. The ld. A.O. relied on the decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. 205 CTR P H 304, 2006 286 ITR 1 P H), wherein it was held that on identical facts, the Hon’ble High Court had disallowed the interest. The ld. A.O. disallowed the netting off thereby reducing the inventory in WIP from Rs.7,32,70,123/- to Rs.704,74,60,471/- and made an addition on the impugned interest income. The ld. CIT(A), on the other hand, held that the fixed deposits credited by the assessee was not out of the surplus fund, but it was only for availing banking facilities and that the assessee company was already paying a higher interest rate against bank over draft facilities and the existing term loan. The ld. CIT(A) relied on the decision of his predecessor in assessee’s case for A.Y. 2014-15 where on identical grounds the addition on interest income was deleted and the same was upheld by the Tribunal vide order dated 11.12.2020.

9. In the above factual matrix of the case, it is observed that the ld. CIT(A) for the year under consideration and for the earlier year has held the interest earned out of fixed deposit to be a capital receipt which was capitalized and reduced from WIP. The co­ordinate bench for A.Y. 2014-15 upheld the order of the ld. CIT(A) by holding that the fixed deposits was created as margin for availing bank loan which was utilized for the business of the assessee, thereby establishing a nexus between the interest earned out of the FD with the business of the assessee and further held that the interest income was rightly netted off with the interest expenditure claimed by the assessee. The co-ordinate bench had relied on various decisions of the Hon’ble High Court and the Tribunal which held that the interest income out of such fund are to be treated as ‘business income’ and not ‘income from other sources’. It is also pertinent to point out that the ld. A.O. has failed to corroborate the fact that the FD made by the assessee is out of the surplus funds held by the assessee in a case where the assessee has borrowed huge advances from banks and has also availed over draft facility for the purpose of its business resultantly expending higher rate of interest than that received out of the FD. The assessee has established that the said funds were incidental to the assessee’ s business activity and, therefore, the same cannot be said to be ‘income from other sources’. We, therefore, draw support from the decisions relied upon by the assessee and by the ld. CIT(A) on this issue and thereby find no infirmity in the order of the ld. CIT(A).

10. In the result, the appeal filed by the Revenue is dismissed.