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Facts
The assessee credited interest on Fixed Deposits (FDs) and debited expenses and opening stock-in-process in their Profit & Loss account, effectively offsetting the interest income. The Assessing Officer and CIT(A) treated the FD interest as income from 'Other Sources' and disallowed the netting/deduction. The assessee argued that the FD was a business asset, pledged for business loans, and the net interest should be considered as business income or deductible.
Held
The Tribunal held that the interest on Fixed Deposits should not be taxed under 'Income from Other Sources' when the FD was used as a business asset, pledged for business loans, and the interest paid on the loan was higher than the interest earned on the FD. The Tribunal noted that identical issues for earlier assessment years were decided in favor of the assessee, and consistency should be maintained.
Key Issues
Whether interest income from Fixed Deposits, used as collateral for business loans, can be considered income from 'Other Sources' and if interest expenditure incurred on such loans is deductible against this income.
Sections Cited
143(3), 57
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, C BENCH, MUMBAI
Date : 30.05.2024 Conclusion of hearing : 31.05.2024 Pronouncement of order O R D E R Per Rahul Chaudhary, Judicial Member: 1. These are 2 appeals pertaining to Assessment Years 2014-15 and 2015-16 preferred by the Assessee against two separate orders, each dated 29/11/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’]. Since the appeals involve common issues the same were heard together and are being disposed by way of a common order. & 617/Mum/2024 (Assessment Years 2014-15 & 2015-16) 2. We would first take up appeal for the Assessment Year 2014-15 which has been preferred by the Appellant challenging the order, dated 29/11/2023, passed by the CIT(A), dismissed the appeal of the Assessee against the Assessment Order, dated 21/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
3. The Appellant has raised following grounds of appeal:
“1. The Ld. CIT(A) fell in error of law in not appreciating that in the facts & circumstances, interest income ought to have been assessed under the head Business Income'.
The Ld. CIT(A) erred in not considering that the assessee was entitled for netting of the interest expenditure against the interest on fixed deposits (FDs).
The Ld. CIT(A) fell in error of law in not appreciating that, even if the interest income is to assessed under the head 'Other Sources', still the interest expenditure is eligible for deduction u/s. 57, against the interest income form FDs.
4. It is submitted that on the identical issue, the Hon'ble Tribunal had held in the assessee's own case for A.Y. 2013- 14, that the assessee is entitled to net off interest expenditure against the interest income.”
We have heard the rival submissions and perused the material on record.
5. There was delay of 12 days in filing the appeal. It has been submitted that order dated 29/11/2023, passed by the CIT(A) for the Assessment Year 2014-15 was received by the Appellant over the e-mail on 30/11/2023. However, the Appellant inadvertently failed to take notice of the aforesaid e-mail. Subsequently, the order for the Assessment Year 2015-16 was (Assessment Years 2014-15 & 2015-16) received over e-mail by the Appellant. When the aforesaid order was sent by the Appellant to the tax professional, a query was raised regarding the order of the Assessment Year 2014-15. On going through the e-mail the Appellant got to know about the order dated 29/11/2023, passed by CIT(A) dismissing appeal for the Assessment Year 2014-15. Soon thereafter, the Appellant took necessary steps and filed the present appeal. In aforesaid facts and circumstances, there was a delay of 12 days in filing the appeal. Keeping in view the aforesaid, we hold that the Appellant was prevented by sufficient cause in filing appeal before the Tribunal. Accordingly, the delay of 12 days in filing the present appeal is condoned.
6. We note that all the grounds raised in the present appeal are directed against the order of CIT(A) whereby CIT(A) has confirmed the addition of INR 66,01,145/- in relation to interest on Fixed Deposits. The facts relevant for adjudication of the aforesaid issue are as under 6.1. During the assessment proceedings, the Assessing Officer noted that in the Profit & Loss Account for the year ending 31/03/2014 of proprietary concern (ie. M/s Midas Builders), the Appellant credited INR 66,01,145/-, being Interest on Fixed Deposit and debited Opening Stock-in-Process (INR 13,65,05,000/-) and expenses incurred during the year (INR 2,05,06,835/-). The Appellant had adjusted interest from Fixed Deposits against Stock-in-Process and expenses, and disclosed Closing Stock-in- process at INR 15,04,10,690 (INR 15,70,11,835/- minus INR 66,01,145/-). Thus, the assessee did not offer any income. Vide questionnaire-cum-notice, dated 04/11/2016, issued by the Assessing Officer, the Appellant was asked to show cause and explain as to why interest income of INR 66,01,145/- on Fixed (Assessment Years 2014-15 & 2015-16) Deposits should not be assessed under the head 'Income from Other Sources' ignoring set-off of the same against Opening stock-in-process and other expenses debited in the Profit & Loss Account. In response, the Ld. Authorised Representative for the Appellant vide letter, dated 24/11/2016, made following submissions:
…..The said amount raised on the FD and used exclusively for the purpose of business, only for the purpose of presentation of Income & Exp, it was shown separately, but it should be netted out and the net balance to be considered. Hence, it should be allowed as business expenses and business income respectively..
6.2. However, the Assessing Officer was not convinced and therefore, made an addition of INR 66,01,145/- being interest on Fixed Deposits.
6.3. In appeal, the CIT(A) decline to grant relief on this issue holding that the Assessing Officer had rightly treated the interest on Fixed Deposits of INR 66,01,145/- as income from Other Sources.
6.4. Being aggrieved, the Appellant has carried the issue in appeal before us.
6.5. Having considered the rival submissions and on perusal of record, we find that the identical issue had come up before the Tribunal in the case of the Assessee pertaining to Assessment Year 2013-14 [ITA No. 3919/Mum/2018, dated 11/12/2020]. Overturning the decision of the Assessing Officer and the CIT(A), the Tribunal deleted the addition and decided the issue in favour of the Assessee holding as under: “3. Brief facts of the issue are as under: During the course of assessment proceedings, it was seen by the A.O. that the assessee had received interest on FD at Rs.60,51,743/-. The closing WIP shown by the assessee was at (Assessment Years 2014-15 & 2015-16) Rs.13,65,05,000/- after claiming expenditure under various heads. It was also seen by the A.O. from the statement of total income of the assessee that eh interest on FD had not been offered to tax under the head ‘Income from other Sources’. The assessee was asked by the A.O. vide a letter dated 09.07.2015 to explain as to why the interest received on FD should not be taxed under the head ‘Income from other sources’. In response to the A.O.’s show cause letter dated 09.07.2015, the AR of the assessee vide letter dated 12.08.2015 submitted before the A.O. that against the mortgage of FD, she had availed credit facility from OD A/c which has been utilized for business. The submission of the assessee was considered by the A.O. but it was not accepted for the following reasons: (1) the assessee had taken loan of Rs.6,16,32,354/- from OD A/c. with Bharat Co-operative Bank and also made investment in FD with the same bank at Rs.6,26,07,051/-. The assessee has received total advances from customers at Rs.17,75,30,806/- and her WIP is only to the extent of Rs.13,65,05,000/-. The assessee was having excess fund of Rs.4,10,25,806/- at her disposal and coupled with the money received on TDR at Rs.99,00,904/-, the excess fund at assessee’s disposal was to the tune Rs.5,09,26,710/-. (ii) no interest had been charged on advances made of Rs.5,60,15,926/-. The above facts were brought to the notice of the assessee by the A.O. vide letter dated 05.01.2016 that the interest on FD was proposed to be taxed under the head Income from other sources. In response to the above, the AR made a written submission vide his letter dated 11.03.2016 before the A.O. The submission of the assessee before the A.O. reads as under: “We would like to state in continuation with our letter dt. 22.01.2016 ft 03/02/2016 that we have invested in business surplus funds its Fixed Deposits and also availed the OVERDRAFT in earlier years. Further in requirement of Funds for the operation of business we had availed loan after pledging the said FD for which we have to pay 2% extra interest to the Banker after netting off the FD Interest Received. The funds availed from OVERDRAFT was used exclusively for the purpose of business only since the capital credit balance of Proprietor as of 31.03.2013 was Rs.67,28,676/-. This clarifies that the funds were not diverted out of the business, therefore, the net interest charged on OVERDRAFT ACCOUNT in excess INTEREST EARNED ON F.D. to be considered instead of GROSS So interest on said FD should be considered as business Income only and Bank OD Interest should be allowed as (Assessment Years 2014-15 & 2015-16) Business Expenditure. Therefore, by any stretch of imagination the said FD Interest cannot be taxed as income from other sources. Therefore, FIXED DEPOSIT CANNOT BE READ IN ISOLATION BUT THE SAME SHOULD TO READ WITH THE OVERDRAFT, SINCE IT IS PLEDGE WITH BANK. Since the fixed deposit was business asset and the interest earned and paid to the bank is business transactions only so the same should be allowed as business income and overdraft interest paid to bank as business expenses as claimed in the financial statements. Further, if you are opting to tax under the head INCOME FROM OTHER SOURCES then the OVERDRAFT INTERST PAID TO BANKERS SHOULD BE ALLOWED U/S. 57, since for earning the deposit interest out client had paid OVERDRAFT INTEREST…..”
4. However the assessing officer was not satisfied. He rejected the above contention by holding that the F.D. was done out of surplus funds and hence it was to be taxed as income from other sources. Learned CIT appeals also confirmed the same.
Against the above order, the assessee has filed appeal before us.
We have heard both the parties and perused the records. We find that the fixed deposit was done in the earlier years and on the pledge of the same assessee has obtained loans for the purpose of business and the same was utilised for the purpose of business. These facts have not been disputed by the authorities below. However on the premise that the fixed deposit was done out of surplus funds available at that time which was much earlier than the present assessment year the authorities below have treated the interest as income from other sources this year. The said fixed deposit was pledged for obtaining. loan for the purpose of the business. It is common knowledge that loan obtained on the pledge of fixed deposit for the purpose of business, the rate of interest charged by the bank slightly higher than the interest being paid on the fixed deposit. Why this aspect is not accepted by the authorities is not understood. The assessee has duly explained that by way of pledging the F.D.'s over draft for the purpose of business was obtained at the rate of interest 2% higher than F.D. rate. What more explanation is required for netting the interest expenditure is also beyond comprehension. If as per the opinion of the authorities below which itself is in fact sitting in the shoes of the businessman, the assessee should have broken the fixed deposit assessee would have been penalized for (Assessment Years 2014-15 & 2015-16) the premature realisation of interest. The fact that the rate of interest charged upon the pledge of fixed deposit is linked to the rate of interest accruing on the fixed deposit has been totally ignored by the authorities below. Moreover the fact that this interest was being treated as- income from business in the earlier years has been ignored by the authorities below. It is settled law that de'horse change in facts or law, the view taken in the earlier years should not be disturbed. This view was expounded by the honourable Supreme Court in the case of Radha Swami Satsang and reiterated in the case of Excel Industries. Hence, in our considered opinion the view of the authorities below to treat the said interest as income from other sources is not sustainable. Accordingly, we set aside the orders of authorities 1 below and decide the issue in favour of assessee.” 6.6. Respectfully the above decision of the Tribunal in the case of the Assessee, we delete the addition of INR 66,01,145/- made by the Assessing Officer in respect of interest on Fixed Deposits. Ground No. 1 to 4 raised by the Appellant are allowed.
We would now take up appeal for the Assessment Year 2015-16. The grounds for appeal raised in appeal for Assessment Year 2015-16 are identical to grounds raised in appeal for the Assessment Year 2014-15. 7.1. During the course of hearing, both the sides agreed that Ground No.1 to 4 raised in the appeal preferred by the Appellant for the Assessment Year 2014-15 as well as the applicable facts are identical to the appeal for the Assessment Year 2015-16, and therefore, our findings and adjudication in respect of Additional Ground No. 1 to 4 of appeal raised by the Appellant for the Assessment Year 2014-15 shall apply mutatis mutandis to the corresponding grounds raised in the appeal for the Assessment Year 2015-16. Accordingly, respectfully the above decision of the Tribunal in the case of the Assessee [[ITA No. (Assessment Years 2014-15 & 2015-16) 3919/Mum/2018, dated 11/12/2020]], we delete the addition of INR 67,08,999/- made by the Assessing Officer in respect of interest on Fixed Deposits. Ground No. 1 to 4 raised by the Appellant are allowed.
In result, the present appeal is allowed.