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<h1>Interest on sale and fixed deposit proceeds from surplus project funds taxable as business receipts, not income from other sources</h1> HC held interest on sale deposits and fixed deposits earned from surplus project funds constituted business receipts, not income from other sources. The ... Classification of interest income - business receipts Or income from other sources - Interest on sale deposits - interest on temporary loan from surplus funds - interest on fixed deposits - HELD THAT:- The assessee received deposits in instalments from prospective purchasers while the work of construction was in progress. If the purchasers failed to make deposits by stipulated dates, they had to pay interest. Secondly, the authorised capital of the assessee was small but the amounts received as deposits were large. Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. The assessee was also required to give a guarantee to the State Bank in respect of the land taken on lease for construction work. For this purpose, certain amounts were kept in fixed deposits on which the assessee earned interest. In these circumstances, the Tribunal has given a finding of fact to the effect that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Accordingly, interest income was considered as the business income of the assessee. Issues involved: Application by Department for reference under section 256(2) of the Income-tax Act, 1961 regarding classification of interest income as business receipts or income from other sources for assessment year 1978-79.Summary:The Tribunal found that the assessee, engaged in building construction, received deposits from purchasers and earned interest on idle amounts deposited with banks or given on temporary loans. Additionally, interest was earned on fixed deposits kept as guarantee for construction work. The Tribunal concluded that all interest income arose from the business activity of the assessee and was considered as business income. Consequently, the High Court discharged the rule and dismissed the application as the finding by the Tribunal was decisive.
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