Interest on Fixed Deposits for Bank Guarantee Classified as Business Income

The High Court of Karnataka ruled that interest accrued on fixed deposits made to secure a bank guarantee for a contract work should be classified as business income, not income from other sources. The court dismissed the Revenue's appeal, upholding the decision of the lower courts in favor of the assessee.

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Issues:
Classification of interest accrued on deposit - business income or income from other sources.

Analysis:
The High Court of Karnataka heard an appeal by the Revenue challenging the order of the Income-tax Appellate Tribunal, Bangalore, which confirmed the Assessing Officer's decision. The main issue raised was whether the interest accrued on a deposit made by the assessee to obtain a bank guarantee should be classified as income from the business or from other sources.

Upon considering arguments from both parties, it was established that the assessee, a contractor, had invested in fixed deposits to secure a bank guarantee for a contract work with KPTCL. The Assessing Officer treated the interest accrued on the fixed deposits as income from other sources, contrary to the assessee's classification of it as business income. This disagreement led to the appeal.

The High Court examined the purpose of the fixed deposits, which was solely to secure the bank guarantee for a contract work. It was determined that such interest accrued on the fixed deposits should indeed be treated as business income, not income from other sources. The Court cited the judgment of the Supreme Court in the case of CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 to support this view.

Ultimately, the High Court dismissed the appeal, upholding that the interest accrued on the fixed deposits should be considered as business income. The question of law was answered against the Revenue, affirming the decision of the lower courts.

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