Section 69A addition on bank fixed deposits remanded; only interest income taxable after verification, not pledged principal

The Tribunal held that the addition under s.69A on account of time deposits with a bank and the related interest was not sustainable without proper factual verification. It noted that the assessee's account had been classified as NPA and the fixed deposits were pledged as security for bank guarantees, with the bank not cooperating in providing details. The matter was remanded to the AO with directions to summon the bank, obtain all relevant information, and reassess the income. The AO was specifically directed to tax only the interest income on the FDs, not the principal pledged as security. The appeal was allowed for statistical purposes.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether the amount represented by fixed deposits placed as margin/security for bank guarantees, which were subsequently invoked by the bank upon the account becoming NPA, could be treated as unexplained money taxable under section 69A of the Act.

(2) To what extent the interest income on such fixed deposits is liable to be assessed as income of the assessee, and what factual enquiry is required for proper determination.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Taxability of fixed deposits given as margin/security and treated as unexplained money under section 69A

Interpretation and reasoning

The Tribunal noted that the assessee had obtained bank guarantees from a bank up to Rs. 4 crores against which it had provided fixed deposits as margin/security. These fixed deposits, along with accrued interest, were stated to have been given as security/guarantee to various institutions and were subsequently invoked and adjusted by the bank when the assessee's account was declared NPA and the premises were taken over under the SARFAESI Act.

The Tribunal recorded that the bank had not responded to repeated requests from the assessee for details, and that there was insufficient material on record regarding the factual particulars of the fixed deposits and their utilisation by the bank. In such circumstances, the Tribunal considered that an enquiry directly from the bank was necessary.

The Tribunal clarified that the principal amount of the fixed deposits, having been provided as security against bank guarantees, does not constitute taxable income if it is otherwise disclosed in the assessee's records, and should not be brought to tax as unexplained money under section 69A.

Conclusions

The principal amount of the fixed deposits furnished as margin/security for bank guarantees, if already disclosed, is not liable to be taxed as income and cannot be treated as unexplained money under section 69A. The assessment on this aspect was set aside for proper verification from the bank.

Issue (2): Assessment of interest income on the fixed deposits and need for further factual enquiry

Legal framework

The Tribunal proceeded on the basis of general principles of income-tax law governing taxability of interest income on fixed deposits, in the context of reassessment proceedings under sections 147, 148, 148A(d) of the Act, and the addition made by the Assessing Officer treating interest as income based on information such as Form 26AS and TDS details.

Interpretation and reasoning

The assessee's communication to the income tax authorities and to the bank, as extracted in the assessment order, showed that TDS had been deducted by the bank on interest credited on fixed deposits during the relevant assessment year. The assessee pleaded lack of records due to closure of business and NPA status, and asserted that the bank had invoked the guarantees and adjusted the fixed deposits and interest against outstanding dues.

The Tribunal observed that the bank had not furnished requisite information despite the assessee's requests and that a proper determination of the correct quantum and nature of interest income required direct information from the bank. The Tribunal found that the Assessing Officer must obtain all relevant details from the bank by issuing summons and then determine the taxable interest income based on such primary evidence.

The Tribunal explicitly stated that only the interest income on the fixed deposits is to be assessed as income, thereby distinguishing it from the principal amount of the fixed deposits furnished as security.

Conclusions

The matter relating to interest income on the fixed deposits was remitted to the Assessing Officer with directions to issue summons to the bank, call for complete details of the fixed deposits and interest, and thereafter re-assess the income in accordance with law, restricting the taxability to interest income alone and not the principal deposit amount used as security.

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