Bombay HC: Interest on FDs and TDS Refund Linked to Business Eligible for Deduction U/S 80IA

The Bombay High Court has ruled that interest earned on fixed deposits and TDS refunds related to business activities are eligible for deduction under Section 80IA of the Income Tax Act. This decision provides clarity on the classification of these income types in the context of tax deductions.

Tax incentives for businesses are being given u/s 80IA of the Income Tax Act, 1961, that are operating in certain sectors such as infrastructure, power, and telecommunications.

Justices B.P. Colabawalla and Firdosh P. Pooniwalla emphasised the essential nature of fixed deposit placements for the eligible business activities of the assessee. They clarified that these fixed deposits were not merely a means to store surplus funds that were otherwise unutilized.

This assertion is further supported by evidence showing that the assessee utilised the fixed deposits specifically for the purchase of cranes needed for its eligible business operations. Thus, there exists a clear and direct connection between the fixed deposits and the operational needs of the eligible business.

The taxpayer was in the business of operating and maintaining a container terminal at Jawaharlal Nehru Port Trust (JNPT), which was qualified for deduction under the provisions of Section 80IA of the IT Act.

From the taxpayer’s business, the interest income has arrived in the previous year. It is the taxpayer’s case that interest was made from money via the eligible business of the taxpayer, and it was used for the objective of its eligible business.

Fixed deposits maintained with banks generate interest income for the business and are related to the taxpayer’s business. On the refund of taxes, interest was charged because of the incorrect tax deduction at source (TDS) by the taxpayer’s customer.

The taxpayer has submitted its income return claiming a deduction u/s 80IA of the IT Act of its business income, which included the interest income.

The claim of the taxpayer for deduction under the provisions of Section 80IA of the IT Act has been accepted by the assessing officer. The income from interest emerges from the income tax refund that was levied by the AO under the head “Income from other Sources”.

Before the Commissioner of Income Tax (Appeals) (CIT), the taxpayer submitted a plea against the assessment order, which was denied.

The taxpayer is dissatisfied with the order of CIT and submitted a plea to the ITAT, which was denied.

As per the revenue, the taxpayer can deploy its funds in any way it desires; however, for deduction under Section 80IA, it is not required. From the deployed profit, additional profit may be generated, i.e., the fruit of profit.

The profit made by the taxpayer in a year is not permitted for deduction, but merely that portion of the profit which is generated in the procedure of creation of eligible infrastructure assets is deductible.

As per the bench, the taxpayer is qualified for the deduction u/s 80IA of the Act on the interest earned via FDs, which were placed by the taxpayer for planning of replacement of equipment under the provisions of the stipulated License Agreement, and due to the tariff dispute.

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The bench, TDS refund obtained by the taxpayer, is an integral part related to the receipt of business income by the taxpayer, and it could not be separated from the business of the taxpayer. The taxpayer in these situations is qualified for a deduction u/s 80IA of the IT Act, on the interest received by it on TDS refunded to it.

The bench asked the revenue to allow deduction u/s 80IA of the I.T. Act to the taxpayer on the income from business in the nature of interest from FDs with the bank and on the interest on TDS refund.

The bench for the above has permitted the appeal and set aside the impugned order.