Interest earned from fixed deposit made from idle business fund to be treated as bussiness Income

The assessee is a Resident Company. As stated by the Assessing Officer, the assessee is engaged in the business of construction, builder and developers, etc. of residential houses, commercial buildings, etc. For the assessment year under dispute, the assessee had filed its return of income on 10.10.2015 declaring a loss of Rs. 73,04,323/-.

On perusal of the profit and loss account, the Assessing Officer noticed that interest earned on Fixed Deposit amounting to Rs. 11,94,395/- was credited to the profit and loss account and has been netted off against the revenue expenses.

The Assessing Officer observed, the assessee is following project completion method of accounting to recognise revenue from its business, whereas, no income was shown from sales/operations of the business. Since, the entire business expense was capitalised, the Assessing Officer held that the interest income cannot be netted off against the revenue expenses. Further he held that the interest income has to be taxed under the head “income from other sources”.

What ITAT Held?

When it is a fact on record that the business fund lying idle with the assessee was invested in fixed deposit for earning some income which can be utilised in the business at the time of need, it has to be held that the interest income is inextricably linked with the business of the assessee. The decision to invest the idle fund lying with the assessee in fixed deposit has to be accepted as a decision taken by a prudent businessman keeping in view the commercial expediency. It is not disputed that the assessee has temporarily parked its business fund in short term deposits varying between 3-9 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. In this context I rely upon the decision of the Hon’ble Bombay High court in case of CIT vs Lok Holdings (supra). Therefore, in my view, the interest income earned on fixed deposits has to be treated as business income of the assesee. That being the case, it has to be set off against the revenue expenses. However this is only to the extent of interest income earned on fixed deposits. As far as income earned from mutual fund and interest from income tax refund, they have to be taxed under the head income from other sources. Thus I allow assessee’s claim of assessment of interest income under the head business to the extent of Rs. 11,74,070/-. Whereas, the balance amount of Rs. 20,325/- is to be taxed under the head income from other sources. In so far as the issue of set off of income from other sources against the revenue expenses in terms of section 71 of the Income Tax Act, I admit the additional grounds as they do not require fresh investigation into facts. However, considering the fact that neither the Assessing Officer nor learned Commissioner (Appeals) have given any conclusive finding on this issue, I restore it to the file of the Assessing Officer for deciding assesee’s claim. Main grounds are allowed, whereas, additional grounds are allowed for statistical purposes.