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Issues: (i) Whether interest earned on fixed deposits kept as lien for bank guarantee in connection with the real estate project was assessable as business income and could be adjusted against work-in-progress. (ii) Whether the disallowance of deduction of interest under section 24(b) required interference, and whether additional evidence should be admitted for adjudication of that claim.
Issue (i): Whether interest earned on fixed deposits kept as lien for bank guarantee in connection with the real estate project was assessable as business income and could be adjusted against work-in-progress.
Analysis: The fixed deposits were maintained only to secure the bank guarantee required for the project. The interest earned on such deposits had a direct nexus with the business activity and with the project cost. The issue was treated as covered by the existing coordinate bench view, under which such interest is not an independent source of income but is to be adjusted against project expenditure or work-in-progress.
Conclusion: The issue was decided in favour of the assessee.
Issue (ii): Whether the disallowance of deduction of interest under section 24(b) required interference, and whether additional evidence should be admitted for adjudication of that claim.
Analysis: The assessee placed additional material to show the source and utilisation of borrowings and their connection with the property. The Tribunal found sufficient cause to admit the additional evidence in the interests of justice. Since the factual foundation regarding the loan nexus required examination of the new material, the matter was sent back for fresh decision after giving the assessee an opportunity of hearing and considering the additional evidence.
Conclusion: The issue was remitted to the Assessing Officer for fresh adjudication.
Final Conclusion: The assessee obtained relief on the treatment of FDR interest, while the claim under section 24(b) was left open for reconsideration on remand after admission of additional evidence.
Ratio Decidendi: Interest earned on fixed deposits maintained as security for a bank guarantee, where the deposits are integrally connected with the business project, bears a direct nexus to business activity and may be adjusted against project cost or work-in-progress.
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