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Facts
The assessee, a legal heir, received arbitration awards of Rs. 6.88 Crores which were initially in the company's account, then transferred to personal FDRs. The AO treated the interest earned on these FDRs as 'Income from Other Sources' and also added back a salary amount. The CIT(A) confirmed the AO's order.
Held
The Tribunal held that interest earned on FDRs invested from business dues transferred to personal accounts is 'Income from Other Sources' and not 'Business Income'. It also held that legal expenses are not deductible under Section 37, and indexation benefits are not applicable to such interest income.
Key Issues
Whether interest income from personal FDRs invested with business funds is 'Business Income' or 'Income from Other Sources', deductibility of legal expenses, and applicability of indexation to interest income.
Sections Cited
143(3), 147, 148, 56(1), 44AD, 37, 57(iii), 56, 48, 2(13)
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Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI LALIET KUMAR & SHRI KRINWANT SAHAY
PHYSICAL HEARING O R D E R PER LALIET KUMAR, JM
This captioned appeals have been filed by the assessee against the separate orders of the ld. Commissioner of Income Tax (Appeals) NFAC, Delhi (hereinafter referred to as the " CIT(A)"), dated 29.06.2024 for the Assessment Years 2012-13, 2017-18 and 2020-21.
As the facts, issues and circumstances in all the appeals are identical, therefore, all the appeals were heard together and are ITA 784, 785 & 786/CHD/2024 2 being disposed of by a common order for the sake of convenience. To dispose of the appeals, the facts are being taken from ITA No. 784/CHD/2024.
This appeal filed by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A)], confirming the assessment order passed by the Assessing Officer (AO) u/s 143(3) r.w.s 147 of the Income Tax Act, 1961 for the Assessment Year 2012-13.
Brief Facts of the Case: The Assessee is an individual and a legal heir of Late S. Harbans Singh Tuli. The history of the case traces back to a company , M/s. Harbans Singh Tuli & Sons, which was engaged in construction contracts with the government. Due to disputes with the MES department and subsequent litigation, the business operations were disrupted.
In the Financial Year 2010-11, approximately Rs. 6.88 Crores were recovered from the Union of India in respect of arbitration awards. This amount was initially received in the accounts of M/s H.S. Tuli & Sons Builders (P) Ltd. However, the funds were transferred to the Assessee's personal savings accounts and subsequently invested in Fixed Deposits (FDRs) in his individual
ITA 784, 785 & 786/CHD/2024 3 name. The Assessee admitted that this was done to earn a higher rate of interest available to senior citizens.
During the reassessment proceedings u/s 147, the AO treated the interest earned on these FDRs amounting to Rs. 51,41,996/- as "Income from Other Sources" and added back a salary amount of Rs. 2,50,000/- which was declared in the original return but omitted in the return filed in response to notice u/s 148.
6.1 However, on filling the appeal before the Ld. CIT(A) , the assessee did not get any relief from the Ld. CIT(A). Hence, the assessee is in appeal before us on various grounds.
Assessee contended that the interest income should be treated as "Business Income" and taxed presumably u/s 44AD because the funds are kept as reserves for restitution applications and ongoing litigation expenses regarding the family business. Further the legal costs incurred (prosecuting various cases) should be allowed as a deduction u/s 37 of the Act. Beside that the Indexation benefits should be applied to the interest income due to inflation, citing that the Tribunal has incidental powers to do justice. Lastly the salary of Rs. 2,50,000/- should not be added as the company from which it was drawn is now non-est.
ITA 784, 785 & 786/CHD/2024 4
Per contra Ld. DR submitted that The AO held that: a) The Assessee held the FDRs in his personal capacity and the interest is earned regardless of any trade or commerce activity performed by the Assessee. It was contended that Interest on FDRs falls under the residuary head "Income from Other Sources" u/s 56(1) and cannot be classified as business income merely because the source of funds was an old business award. The salary of Rs. 2,50,000/- was admittedly received and declared in the original return, and its omission in the Section 148 return was a misreporting of income.
We have heard the rival contention of the parties and perused the material available on the record.
Ground No. 1: Treatment of Interest Income (Business vs. Other Sources) The undisputed fact is that the FDRs are held in the individual name of the Assessee. While the funds may have originated from the recovery of dues of a company/firm, once they were withdrawn and invested in personal Fixed Deposits to earn interest, the character of the income is that of "Interest. Section 2(13) of the Act defines "business" as involving trade, commerce, or manufacture. Passive earning of interest on Fixed Deposits, specifically when held by an individual distinct from the contracting entity, does not constitute a "business activity." The ITA 784, 785 & 786/CHD/2024 5 Assessee's primary activity during the year was not construction but litigation and investment. Therefore, the Lower Authorities were correct in taxing Rs. 51,41,996/- as "Income from Other Sources" u/s 56. The claim for presumptive taxation u/s 44AD is rightly rejected. Further the activities of assessee were not in the nature of eligible business hence the invocation of 44AD by assessee was not appropriate. Hence this ground is decided against the assessee .
Ground No. 2: Deductibility of Legal Expenses. Since the income is classified as "Income from Other Sources," deductions are governed by Section 57(iii), which allows expenditure laid out wholly and exclusively for the purpose of making or earning such income. The legal expenses incurred by the Assessee relate to the recovery of old contract dues and to the firm/company's disputes. These expenses do not have a direct nexus with the earning of interest from the Bank Fixed Deposits. The bank's interest accrues under the deposit contract, regardless of the litigation outcome. Therefore, the deduction u/s 37 (which applies to business income) is not available. Hence ground no-2 is dismissed.
Ground No. 3: Indexation of Interest Income The Assessee has argued for the indexation of interest income based on inflation. We find no merit in this submission. The Income Tax Act, 1961,
ITA 784, 785 & 786/CHD/2024 6 contains specific provisions for indexation under the head "Capital Gains." No provision in the Statute allows for the indexation of interest income taxable under "Income from Other Sources. While the Assessee argued regarding the Tribunal's powers, the Tribunal’s powers are to interpret the law, not to legislate. We cannot read into the Act a provision for indexation of interest where Parliament has not provided one. Interest on FDs is taxable income under the statutory framework. Furthermore, the computation of capital gains is governed by section 48 of the Act, which provides for indexation only in cases involving transfer of a capital asset. Undoubtedly, there exists a dispute as to whether the FDR constitutes a capital asset or not. However, it is an undisputed fact that there has been no transfer of the FDR by the assessee to any third party. In the absence of any transfer, the very foundation for invoking the provisions relating to computation of capital gains, including indexation, does not arise. In our considered view, once there is no transfer, the machinery provisions of section 48 cannot be set into motion in the present case. Further, having already held that the interest income is chargeable under the head “Income from Other Sources” in terms of section 56 of the Act, there remains no scope for the application of any other special or computation provision when the special charging provision squarely applies to ITA 784, 785 & 786/CHD/2024 7 the facts of the case. Accordingly, the contentions advanced by the assessee are found to be devoid of any legal basis and are therefore rejected.
Ground No. 4: Addition of Salary Income : It is noted that the assessee had originally offered salary/pension income of ₹2,50,000/- in the return of income filed for the relevant assessment year. However, in the return filed in response to notice issued under section 148 of the Act, the said income was omitted. The explanation of the assessee is that the employer company was subsequently struck off and the Revenue has intimated to the assessee that the return filed against PAN No.AFRPT6944G is treated as non-est. The ld. DR relied upon the order.
We have heard. In our view, once the Revenue itself has treated the return of income filed for the assessment year 2012-13 as non-est, there is no question of adding the salary income based on such non-est ITR in the hands of the assessee. No documents have been brought to our notice that the assessee has drawn salary during the year under consideration. Therefore, in our view, the Revenue cannot make the addition of Rs.2,50,000/- in the hands of the assessee. In view of the above, Ground No.4 is allowed.
ITA 784, 785 & 786/CHD/2024 8
14. Conclusion: In view of the above discussion, we find no infirmity in the order of the Ld. CIT(A). The assessment of interest as Income from Other Sources without indexation is upheld and addition on account of undeclared salary is deleted.
The appeal filed by the Assessee is partly allowed.
As the facts, issues and circumstances in all the appeals are identical, therefore, our findings given in will apply mutatis-mutandis to and 786/CHD/2024. Accordingly, all the appeals of the assessee are partly allowed.
In the result, appeals of the assessee are partly allowed.
Order pronounced on 16.12.2025.