By TIOL News Service

NEW DELHI, DEC 03, 2018: THE issue is - Whether interest earned on fixed deposit can be said to have a direct nexus with business activity, if assessee purchased fixed deposits with share application money. YES is the answer.

Facts of the case

The assessee company belongs to Superior Group having the aim and object to do business in shipping line, filed its return for the relevant year. During the course of scrutiny assessment proceedings, the AO noticed that the only income declared by the assessee is the interest income on fixed deposits. Further, the AO noticed that the expenses claimed by the assessee has no relevance with the interest income earned and thus, asked the assessee to justify. The assessee submitted that SBLC was taken for an amount of Euro ten millions and the primary objective of SBLC was investment in FDR's to obtain SBLC pertaining to assessee's business activity. However, the AO was of the view that the FD's were not for business activity of the assessee but were used in business activity of other group concerns located and operating outside India. Further, AO observed that interest earned on FD's cannot be treated as business income. Accordingly, various expenses claimed by the assessee were disallowed and added back to the income of the assessee. On appeal to the CIT(A) the assessee got a small amount of relief and the balace expenditure was confirmed. Since interest income have been earned on bank FDs which were made for the purpose of obtaining SBLC for another company, therefore, interest income was taxed under the head "income from other sources". Therefore, the assessee appealed before the Tribunal.

On appeal the Tribunal held that,

++ the assessee restructured its share business by floating two group companies. The FD's made by the assessee was used for the purpose of obtaining SBLC issued by the bank for business purpose of the assessee company. The expenses have to be incurred for the purposes of business of the assessee and not for the purposes of earning profits. However, the lower authorities disallowed the expenses because the assessee had not earned any profit from its business activity. Thus, the disallowance made by the AO is on false premise. Accordingly, the Tribunal directed the AO to allow the expenditure made in furtherance of business activity of assessee company.

++ the fixed deposits were purchased by the assessee company out of share application money received from group concerns and, the fixed deposits were used for obtaining SBLC of 10 million Euros in furtherance of business activity of the assessee company alongwith its group companies. Thus, interest earned on fixed deposit has a direct nexus with the business activity of the assessee and such interest bears the requisite characteristics of business income and has nexus with the business activities of the assessee, cannot be faulted with. Interest earned on fixed deposits would form part of profits of the business of the assessee company. Therefore, the Tribunal directs the AO to tax interest income under the head "Profits and gains of business or profession".

(See 2018-TIOL-2297-ITAT-DEL)