Ideal fund of business deposited in Bank as Fixed Deposit (FD), Interest Income of Fixed Deposit is treated as Business Income.
The assessee is a resident Company. As stated by the Assessing Officer, assessee is engaged in the business of construction, builder and developers etc. of residential houses, commercial building etc.
In course of its construction business the assessee received advances from customers which are deposited in the bank account. He submitted, the surplus available in the bank account out of the deposits made, which is not immediately required to be utilised in the business, is kept in short term deposits for periods varying between three months to nine months. He submitted, when the need arises, the assessee encashes the fixed deposits and makes payment to the contractors engaged in construction of projects.
Thus, he submitted, the fixed deposits on which the assessee earned interest are from assessee’s business income, hence the interest income earned thereon is inextricably linked with assessee’s business. He submitted, for commercial expediency assessee has invested the idle money lying with it in short term deposits for earning better rate of interest, which in turn, goes to reduce the cost of the construction as the money invested in the fixed deposit is ultimately utilised for making payment for the business.
The conflict between the assessee and the revenue is in relation to the head under which interest income earned by the assessee is to be assessed. It is a fact on record that the assessed is engaged in construction business as a developer and builder. It is also not in dispute that the assessee follows project completion method for recognising revenue from its construction business. It is evident, in the year under consideration the assessee has not recognised any revenue from its business operations and has capitalised the expenses incurred. It is the contention of the assessee from the assessment stage itself that the advances received from the customers are deposited in current account and the surplus fund lying idle, which is not immediately required for the purpose of business, is kept in short term deposits to earn some amount of interest income which could ultimately go to reduce the cost of the project. The fact that the assessee has made the fixed deposits out of surplus fund generated from the construction business has not been disputed by the departmental authorities. In fact, learned Commissioner (Appeals) has accepted the aforesaid factual position. However, he rejected assessee’s claim of business income on the reasoning that the assessee invested in fixed deposits only for the purpose of earning interest income.
When the need arises, assessee encashes the fixed deposits and utilises the funds for its business purpose. In the aforesaid scenario. it can not be said that the interest income is not inextricably linked with the business of the assessee. Therefore, in my view, the interest income earned on fixed deposits has to be treated as business income of the assesee.
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