ITAT Deletes Income Tax Addition On Interest Income Received Out Of FDs

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition on the interest income received out of the fixed deposits.

The bench of Kavitha Rajagopal (Judicial Member) and B R Baskaran (Accountant Member) has observed that AO has failed to corroborate the fact that the FD made by the assessee is out of the surplus funds held by the assessee in a case where the assessee has borrowed huge advances from banks and has also availed of an of an overdraft facility for the purpose of its business, resultantly expending a higher rate of interest than that received out of the FD.

The respondent/assessee company is in the business of real estate development and construction of residential and commercial premises and had filed its return of income on 30.09.2015, declaring a loss of Rs. 4,84,78,892/-. The assessee's case was selected for limited scrutiny, and notice was duly issued and served upon the assessee for the purpose of verifying the interest income received out of the fixed deposits, which has not been offered to tax by the assessee in its return of income.

The Assessing Officer passed the assessment order where the total loss was determined after making an addition on the interest income and on the delayed deposits of employees contribution to PF.

The assessee preferred the appeal before the first appellate authority. The first appellate authority deleted the addition on the interest income received out of the fixed deposits on the ground that the fixed deposits were not out of the surplus fund.

The assessee contended that the assessee company had a total term loan of Rs.675.81 crores and had also availed bank overdraft facility against such fixed deposit for the purpose of the banking requirements during the year under consideration. The interest on the bank overdraft was more than the interest received on fixed deposits by 1%, and the term loan is also at a higher interest rate than that of the bank overdraft facility. The fixed deposits were made only for the purpose of banking requirements where the promoter's contribution to the business was a requirement. The fixed deposits are not out of the surplus funds and are only an arrangement for availing banking facilities. The interest out of the said fixed deposits has direct nexus to the business of the assessee, and the assessee had rightly netted off the interest income with the interest expenses.

The court upheld the decision of CIT(A) and held that the assessee has established that the said funds were incidental to the assessee's business activity and, therefore, the same cannot be said to be 'income from other sources'.

Counsel For Petitioner: Pradip Kapasi

Counsel For Respondent: P. D. Chougule

Case Title: DCIT Versus Evita Construction Pvt. Limited

Case No.: IT A No. 3914/Mum/2023

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