2025 (8) TMI 1443 - HC - Income Tax

Interest on fixed deposits and tax-refund TDS held deductible under Section 80IA as incidental to eligible business activity

Gateway Terminals India Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Raigad and Income Tax Appellate Tribunal, Mumbai & Ors.

Gateway Terminals India Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Raigad and Income Tax Appellate Tribunal, Mumbai & Ors. - 2025:BHC - AS:36550 ... ISSUES PRESENTED AND CONSIDERED 1. Whether interest from fixed deposits, created by an enterprise for (i) planning replacement of contractually mandated equipment and (ii) holding disputed tariff collections pursuant to a court order, constitutes 'profits and gains derived by an undertaking or an enterprise from any business' within the meaning of Section 80IA of the Income Tax Act and is therefore eligible for deduction. 2. Whether interest received on refund of tax deducted at source (TDS refund interest), where TDS was withheld by customers from business receipts, is part of the profits and gains 'derived by' the enterprise from the eligible business under Section 80IA and thus deductible. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under Section 80IA of interest from fixed deposits maintained for equipment replacement and to hold disputed tariff receipts Legal framework: Section 80IA permits a deduction of profits and gains 'derived by an undertaking or an enterprise from any business referred to in sub-section (4)' (eligible infrastructure business). The statutory phrase 'derived by' requires a nexus between profits and the eligible business. Precedent treatment: The Court considered and applied authority holding that: (a) where placement of funds is imperative for carrying on the business, interest thereon is business income (Karnataka State Co-operative Bank); (b) interest incidental to a statutory or contractual requirement tied to business purpose is not treated as income from other sources (Shree Rama Multi Tech; Arul Mariammal Textiles); (c) interest on short-term deposits kept aside for business purposes is business income (Indo Swiss Jewels); and (d) fixed deposits kept due to business compulsion may yield interest deductible under 80IA (Hiranandani Builders/PCIT affirmed). Interpretation and reasoning: The Court examined the contractual license provisions that mandated equipment replacement (specific clauses requiring planned replacement and Appendix reference) and an earlier undertaking to replace equipment. Facts established that funds were put into fixed deposits specifically to meet future contractual replacement obligations and to segregate amounts collected under an interim court order resolving a tariff dispute. Subsequent years' financials showed redemption of those fixed deposits and acquisition of cranes, demonstrating actual business application. Applying the precedents, the Court held that where (i) placement of funds is imperative or compelled by contractual obligation and (ii) the funds are not idle surplus but set aside for a business purpose directly linked to the eligible activity, interest earned is derived from the eligible business. Ratio vs. Obiter: The points addressing that compulsory or business-purpose placement of funds yields interest that is business income are treated as ratio-applied decisively to find the interest deductible. Distinguishing authorities where funds were merely surplus or where receipts were benefits arising from government schemes (Liberty India, Sterling Foods, Shah Originals) are part of the Court's core reasoning (ratio) to delimit the scope of 'derived from'. Conclusion: Interest earned on fixed deposits maintained to plan and effect contractual replacement of equipment and to hold disputed tariff collections is 'profits and gains derived ... from' the eligible infrastructure business and is deductible under Section 80IA for the assessment year in question. Issue 2 - Deductibility under Section 80IA of interest on TDS refunds Legal framework: Same statutory provision and interpretive test-whether the receipt is derived from the eligible business and has a direct nexus with business receipts. Precedent treatment: The Court relied upon authorities recognizing that interest payable for delayed payment of sums due under contracts or interest on TDS refunds (where deduction was beyond the assessee's control) partakes the character of business receipts (Govind Choudhury & Sons; Hiranandani Builders; PCIT v. Hiranandani Builders at appellate level). Interpretation and reasoning: The Court found that TDS had been wrongly deducted by customers from payments for use of the port facility, so the TDS amounts formed part of the enterprise's sales receipts. The interest on refund arose because the revenue department refunded amounts that should have been received earlier as business receipts. The deduction of TDS was beyond the enterprise's control; had excess TDS not been deducted the sums (and any use thereof) would have been available for business purposes. Under these circumstances and by analogy to authorities treating interest on delayed contractual payments as business income, the Court held the TDS refund interest to be integrally connected with the business receipts and therefore derived from the eligible business. Ratio vs. Obiter: The determinative holding that interest on TDS refunds, when arising from withheld business receipts beyond the assessee's control, is business income under Section 80IA is ratio and applied to the facts. Distinguishing Liberty India and similar cases (where the immediate source was a government incentive scheme remote from the business) is part of the operative reasoning. Conclusion: Interest received on TDS refunds that relate to business receipts and which arose from withholding beyond the enterprise's control is 'derived from' the eligible business and deductible under Section 80IA for the relevant assessment year. Treatment of contrary authorities relied upon by Revenue Legal framework: Authorities relied upon by Revenue emphasize a narrow reading of 'derived from' to require direct, proximate source connection and exclude receipts that are one step removed, or income from deployment of surplus funds. Precedent treatment and interpretation: The Court distinguished those authorities on their facts: (a) Liberty India and similar cases concerned government incentive schemes or statutory benefits remote from the core business activity (one step removed), not funds held because of contractual/business compulsion; (b) Shah Originals and Sterling Foods involved receipts arising from foreign exchange gains or sale of export entitlements, which lacked direct nexus to core business operations; (c) cases classifying interest as other income involved deposits of surplus idle funds not compelled by business requirements (Swani Spices). Ratio vs. Obiter: The distinction between compelled/business-purpose deposits and merely surplus investments is central to the Court's ratio; the cases cited by Revenue are treated as not controlling where business compulsion and demonstrable nexus exist. Conclusion: The authorities invoked by Revenue do not govern where funds are imperatively or contractually required to be kept for the eligible business and where subsequent application of those funds to business purposes is shown. Final Disposition 1. The Court answered the referred substantial questions of law in the negative as phrased for Revenue and in favour of the enterprise, concluding entitlement to deduction under Section 80IA for (a) interest on fixed deposits held for contractual equipment replacement and to hold disputed tariff collections, and (b) interest on TDS refunds relating to business receipts, for the assessment year under consideration. 2. The impugned tribunal conclusions denying deduction on both categories of interest were set aside to the extent indicated, and directions issued to grant the Section 80IA deduction for those items for the relevant assessment year.