Interest on fixed deposits treated as business income when used as margin for business loans

ITAT Mumbai upheld CIT(A)'s decision allowing interest on fixed deposits as business income rather than income from other sources, finding established business nexus as FDs were used as margin for business loans. The tribunal also upheld deletion of disallowance for interest-bearing funds diverted to subsidiaries as interest-free loans, determining business expediency was established since funds were granted for business purposes and land development. Both appeals by revenue were dismissed.

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Issues Involved:
1. Deletion of addition made to income under the head "Income from Other Sources" for interest received on fixed deposits (FD).
2. Disallowance of interest for diversion of interest-bearing funds to interest-free loans to related parties.

Issue-wise Detailed Analysis:

First Issue: Deletion of Addition Made to Income under the Head "Income from Other Sources" for Interest Received on FD

Background:
The assessing officer treated the interest on FD amounting to Rs. 72,07,590/- as "Income from Other Sources." The officer noted that the appellant had deposited unutilized funds and earned interest thereon, rejecting the appellant's contention that the interest should be netted off with interest expenses and capitalized. The officer relied on the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd vs CIT (SC) to support this treatment.

CIT(A) Decision:
The CIT(A) deleted the addition, holding that the fixed deposits were created for availing banking facilities for business. The CIT(A) found a nexus between the deposits made out of business necessity and the interest earned on term deposits temporarily made to reduce the interest burden on funds borrowed for the purchase of land. The CIT(A) cited several judgments to support this view, including:
- CIT Vs. Lok Holdings (2009) 308 ITR 356 (Bom)
- Satishchandra and Co. Vs. CIT (1998) 234 ITR 79 (Kar)
- Voltas International Ltd. Vs. ACIT (2010) 2 ITR (Trib) 410 (Mum)
- Eveready Industries India Ltd. Vs. CIT (2010) 323 ITR 312 (Cal)
- VBC Industries Ltd. Vs. DCIT (2011) 44 SOT 55 (Visk) (URO)
- CIT Vs. Tirupati Woolen Mills Ltd. (1992) 193 ITR 252 (Cal)
- CIT Vs. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 536 (Mad)
- CIT Vs. Paramount Premium P. Ltd. (1991) 190 ITR 259 (Bom)
- CIT Vs. Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP)

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the fixed deposits were created and used as margin for obtaining bank loans for business purposes, establishing a business nexus. The Tribunal agreed that the issue might not have much revenue impact and found no infirmity in the CIT(A)'s order allowing the netting off of the interest.

Second Issue: Disallowance of Interest for Diversion of Interest-bearing Funds to Interest-free Loans to Related Parties

Background:
The assessing officer disallowed proportionate interest for diversion of interest-bearing funds to interest-free loans to related parties. The officer noted that the assessee had advanced interest-free loans to wholly-owned subsidiaries and other vendors, which were not for business exigencies.

CIT(A) Decision:
The CIT(A) deleted the addition, holding that the advances were made to wholly-owned subsidiaries owning plots of land being developed by the assessee-company. The CIT(A) found that the advances had a direct nexus with the business of the appellant and were made out of commercial expediency. The CIT(A) relied on the judgment in S.A. Builders Ltd. vs CIT, 288 ITR 1, and the Bombay High Court's decision in The Commissioner of Income Tax-7 Vs M/s Reliance Communications Infrastructure Ltd, Income Tax Appeal No. 3155 OF 2009.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the funds were granted to subsidiaries and other parties for business purposes. The Tribunal found that the business expediency was established, and the ratio from the Supreme Court decision in S.A. Builders applied. The Tribunal concluded that no disallowance on account of diversion of interest-bearing funds was permissible once business expediency was established.

Conclusion:
The appeal by the revenue was dismissed, and the order was pronounced under Rule 34(4) of the ITAT Rules by placing the result on the notice board on 11.12.2020.

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