Interest Earned On FDs Kept As Security For PG Is Taxable As Business Income: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the interest income earned on fixed deposits kept as security for performance guarantees is taxable as business income and can be set off against project expenses.

The single bench of Saktijit Dey (Judicial Member) has directed the Assessing Officer to refund the TDS amount to the assessees.

The assesses/appellants are resident corporate entities and are wholly owned subsidiaries of National Commodities Management Services Ltd. (NCML). The assessees have entered into a concession agreement with the Food Corporation of India (FCI) for the construction, operation, and maintenance of the Silo Complex for storage of food grain on behalf of FCI at Varanasi and Bhattu under a design, build, finance, own, and operating model for a period of 30 years.

In terms of the concession agreements, the assessees have to construct Silo Complex within a specified period from the date of signing of the concession agreements.

The assessees filed their return of income, declaring NIL income and claiming a refund of the tax deducted at source (TDS). While processing the return of income, the Centralized Processing Centre (CPC) in Bangalore rejected the assessee's claim for a refund, citing a mismatch between the return of income and Form 26AS.

The assessee appealed the intimation issued under Section 143(1) rejecting the claim for a refund.

The assessees contended that under the terms of the concession agreement with FCI, the assessees must provide a bank guarantee, and in order to obtain a bank guarantee, the assessees must keep a certain amount in fixed deposits that earn interest.

The assessees submitted that since the interest income earned on the fixed deposits is intrinsically connected with the business activity for construction and maintenance of the Silo Complex, the interest income has been adjusted against the cost of construction and the balance amount has been shown as capital work in progress in the audited financial statement. Since the interest income has arisen in the assessment year under dispute, the assessees are entitled to claim a refund of the TDS amount. The assessees relied upon Rule 37BA of the Income Tax Rules, 1962.

The Commissioner (Appeals) did not find merit in the submissions of the assessee. He observed that since the interest income has not been offered to tax as a revenue receipt, but rather has been adjusted against the cost of construction, the interest income corresponding to the TDS amount does not qualify as income. Thus, he held that TDS could not be refunded to the assessees.

The ITAT while allowing the appeal, noted that the only reason the department has refused to grant a refund of the TDS amount is that the interest income has been adjusted against the construction expenses.

Case Title: NCML Varanasi Private Limited Versus ITO

Citation: ITA No. 347/Del/2022

Date: 14.11.2022

Counsel For Appellant: CA Nitish Ranjan

Counsel For Respondent: Sr. DR Om Prakash

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