In a recent ruling, the Rajasthan High Court held that the interest earned on Fixed Deposit receipts used by the assessee as borrowing margin money for funds for setting up the industry is revenue income.
The division bench while allowing a departmental appeal held that such income is taxable under the head “Income from Other Sources” under the provisions of Income Tax Act.
In the instant case, the Commissioner of Income Tax, while invoking his revisional jurisdiction under section 263 of the Income Tax Act, held that the interest earned by the assessee, M/S Bhawal Synthetics (India) Udaipur, on Fixed Deposits is not business income but from other sources and, therefore, is liable to be taxed. He further treated the same as margin money required for obtaining letter of credit or bank guarantee etc, and denied assessees’ claim for set off.
On appeal, the Income Tax Appellate Tribunal set aside the order.
Before the High Court, the department relied on the apex Court ruling in Tuticorin Alkali Chemicals & Fertilizers Limited Vs. Commissioner of Income Tax wherein it was held that the interest earned on short-term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on the ground that it would go to reduce interest on borrowed amount which would be capitalized.
Reversing the ITAT order, the division bench comprising of Justice Govind Mathur and Justice Vinit Kumar Mathur observed that, the assessee had income of interest through FDRs and while setting off that the Assessing Officer as well as the ITAT did not examine the aspect as to under which provision the assessee claimed deduction or set off of his income from other sources against interest payable on the borrowed fund. “The reason given is that the amount pertaining to FDR was not surplus amount but part of amount that was kept to obtain letter of credit for purchase of machinery. While accepting the fact that the FDR was for obtaining letter of credit to purchase machinery but so far as interest earned thereon is concerned, that is nothing but income through other sources, as such, the Commissioner of Income Tax rightly treated the same as income taxable.”
Read the full text of the Judgment below.
