S. 40(b) Interest on deposits for availing bank guarantee is business income

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INCOME TAX APPELLATE TRIBUNAL, COCHIN

I.T.A. No. 109/Coch/2010 – Assessment Year:2002-03

Solvents and Chemicals Vs. The Assistant Commissioner of Income-tax

Date of Decision – Dated: 29th July, 2011

It is the purpose or the proximity to the purpose, which would determine the character of the asset and, thus, that of the income arising there-from and, consequently, its assessability under the Act, going on to hold that where the amount was deposited in the bank to obtain a letter of credit for purchase of a capital asset (machinery), the interest thereon would only be a capital receipt, which shall go to reduce the cost of the relevant capital asset. The said decisions, in our view, full govern the present case, and the Revenue has misapplied the decisions by the hon’ble jurisdictional high court. We, accordingly, hold the impugned interest income of Rs. 471612/- as liable to be assessed as business income under Chapter IV-D of the Act. Accordingly, it would be entitled to deduction qua remuneration allowed to working partner/s by considering the said income as part of the `book profit’ under Explanation 3 to s. 40(b)(v). We decide accordingly.