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Issues: (i) Whether interest earned on fixed deposits made for business exigencies is to be assessed as business income or income from other sources. (ii) Whether section 115JB of the Income-tax Act, 1961 applies to an electricity company governed by the Companies Act, 1956 and the special regulatory regime for generation of power, for the assessment year involved.
Issue (i): Whether interest earned on fixed deposits made for business exigencies is to be assessed as business income or income from other sources.
Analysis: The fixed deposit interest could be treated as business income only if the deposits were made as a business necessity and had a direct nexus with the business, rather than as deployment of surplus funds for earning interest. The authorities below had not recorded a clear finding on the purpose of the deposits. The matter therefore required factual verification in the light of the settled principle that interest on deposits made for securing business needs may assume the character of business income.
Conclusion: The issue was remitted to the Assessing Officer for fresh examination. If the deposits were made for business purposes, the interest income was to be assessed as business income.
Issue (ii): Whether section 115JB of the Income-tax Act, 1961 applies to an electricity company governed by the Companies Act, 1956 and the special regulatory regime for generation of power, for the assessment year involved.
Analysis: Prior to the amendment by the Finance Act, 2012 with effect from 1 April 2013, the MAT computation under section 115JB was linked to accounts prepared under Parts II and III of Schedule VI to the Companies Act, 1956. An electricity company governed by the special statutory framework was not required to prepare accounts in that manner and the amendment widening the scope of section 115JB was prospective. For the assessment year under consideration, the provision could not be invoked against such a company.
Conclusion: Section 115JB was held to be inapplicable to the assessee for the relevant assessment year.
Final Conclusion: The appeal succeeded on the MAT issue and was sent back only on the characterization of fixed deposit interest, with the remaining challenge disposed of accordingly.
Ratio Decidendi: Where an electricity company is not statutorily required to prepare its accounts in the form mandated by section 115JB as it then stood, MAT cannot be applied for assessment years prior to the prospective amendment, and interest on deposits made for business exigencies may be taxed as business income if a direct business nexus is established.
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