Interest on Bank FDRs to maintain the Minimum Interest Reserve Account is taxable as Business-Income

Brief Facts of the case

• The assessee company engaged in business as builders and the developer. During the relevant period in the assessment year, it earned interest to the extent of Rs. 77,25,153/- on FDRs which was not offered for taxation; instead it was set-off with projects in progress.
• Holding that interest income was unrelated to the business activity of the assesse the A.O. treated this income to be income from other sources.
• On appeal, the CIT (A) accepted the contention of the assesseethat the interest was earned from the mandatory deposit required for raising finances for the purpose of its business and accordingly treated the same as business income. The CIT(A) further rejected applicability of Tuticorn Alkali Chemicals & Fertilizers Ltd. CIT (997) 227 ITR 172 (SC) in the assessee’s case, being different on facts.
• The ITAT upheld the CIT(A)’s decision.

Contention of the revenue

• The Revenue urged that the test indicated in Tuticorin (supra) squarely applied to the facts of the case. In this case, SC held that if company, even before it commences business, keep the surplus funds in short-term deposits in order to earn interest, such interest will be chargeable under section 56 of the Income-tax Act.
• It further relied on the following judgments:
  • Commissioner of Income Tax v. Bokaro Steel 236 ITR 315 (SC)
  • Indian Oil Panipat Power Consortium Ltd ITO (2009) 315 ITR 255 (Del HC)
• In such cases, the interest receipts were inextricably linked with the setting up of the capital structure of the assessee-company. Accordingly, these were viewed as capital receipts thereby reducing the cost of construction.
• Similarly, the Supreme Court held that such receipts are not income in CIT v. Karnataka Power Corporation, 247 I.T.R. 268 (SC) and Bongaigaon v. Refinery and Petro Chemical Co. Ltd. v. Commissioner Income Tax 251 I.T.R. 329 (SC).

Held by Respective Court

• The case-laws relied upon by the Revenue were not applicable on the assessee, being different on facts.
• Further, the mandate of Section 117C of the Companies Act also supports this view, because a debenture debtor such as the assessee in this case, is compelled to a certain margin separately, to secure the interest of the debenture holders.
• Also, in regard to claim of expenditure on Registrar of Companies’ fee for increase in authorized share capital, the HC held that the same could not be allowed and was also not amortizable under Section 35D (2)(c)(iii) of the Act, not being fee for initial registration of the company. Reliance in this regard was placed on the Supreme Court judgments in Brook Bond India Ltd. v. Commissioner of Income Tax 225 ITR 798 and Punjab State Industrial Development Corporation Ltd. v Commissioner of Income Tax 225 ITR 798.