Interest on fixed deposits for letter of credit is business income, rules court.

The court ruled in favor of the appellant, determining that the interest earned on fixed deposits invested to obtain a letter of credit should be classified as business income rather than income from other sources. The court overturned the decision of the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal, confirming the original assessment treating the interest as business income.

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Issues involved: Determination of whether interest earned on fixed deposits invested for obtaining a letter of credit should be treated as business income or income from other sources.

Summary:

Issue 1: Classification of interest income
The appellant, engaged in silk waste and silk textiles business, invested certain funds in fixed deposits to secure a letter of credit. The interest received from these fixed deposits was declared as business income by the assessee. The Assessing Officer initially accepted this treatment, but the Commissioner of Income Tax (Appeals) later initiated revisional proceedings. The Commissioner directed the assessee to re-compute income under Sec. 80 HHC of the Income Tax Act, excluding the interest received on fixed deposits and categorizing it as income from other sources. The Income Tax Appellate Tribunal dismissed the appeals challenging this decision. The counsel for the assessee argued that the interest on fixed deposits should be considered business income, citing a previous judgment of the court. It was contended that the fixed deposits were made in connection with the business to avail the benefits of a letter of credit, not for earning interest. The court agreed with this interpretation, referencing the earlier judgment, and ruled in favor of the assessee.

Decision:
The court allowed the appeal, setting aside the order of the revisional authority upheld by the tribunal. The original assessment order by the Assessing Officer, treating the interest as business income, was confirmed.

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