2011 (1) TMI 574 - HC - Income Tax

Income from Fixed Deposits for Bank Guarantee = Business Income, Not Other Sources. Interest is vital for operations. Court affirmed.

Commissioner of Income-tax, Central Circle, Bangalore Versus Chinnanachi Muthu Construction & Co.

The Tribunal held that income derived from Fixed Deposits for obtaining a bank guarantee constitutes business income, not income from other sources. The ... Income derived out of the Fixed Deposits - Business income or income from other sources - Held that: - the investment of amounts in Fixed Deposits by the assessee, was only to secure a bank guarantee in order to acquire a contract work, and therefore it cannot be treated as income from other sources and interest accrued on such Fixed Deposits has to be treated as business income only in view of the Judgment of the Apex Court in the case of CIT v. Govinda Choudhury & Sons [1992 (4) TMI 8 - SUPREME Court] - Issues:1. Classification of income derived from Fixed Deposits for obtaining a bank guarantee as business income or income from other sources.Analysis:The primary issue in this case revolves around the classification of income derived from Fixed Deposits kept in a bank to obtain a bank guarantee. The Tribunal held that such income constitutes business income and not income from other sources, as contended by the revenue. The assessee, a partnership firm engaged in electrical business, deposited amounts in Fixed Deposits to furnish a bank guarantee required by KPTCL for their business activities. The Assessing Officer initially treated this income as income from other sources, leading to an appeal by the assessee.Upon review, the Tribunal determined that the Fixed Deposits maintained in the bank to secure bank guarantees for business purposes are an integral part of the business activity. Therefore, the interest earned on these Fixed Deposits cannot be isolated from the business income but should be considered as part and parcel of the business income itself. This decision was based on the rationale that the interest accrued on the Fixed Deposits was directly linked to the business operations and was essential for obtaining advances to carry out construction work. Consequently, the Tribunal dismissed the appeal filed by the assessee, upholding the classification of the income as business income.In a subsequent argument, the revenue cited a previous judgment by the Court in a related case involving the same assessee. The Court had ruled that investments in Fixed Deposits to secure bank guarantees for business contracts should be treated as business income, relying on a precedent established by the Apex Court. The revenue's counsel emphasized the consistency of this decision with the current case and urged that the appeal be dismissed based on the precedent set by the earlier ruling, which had achieved finality. Consequently, the Court found no grounds to entertain the revenue's appeal and upheld the Tribunal's decision, affirming that the interest income from the Fixed Deposits should indeed be classified as business income in this scenario.