Interest Earned On Deposits Maintained Out Of Business Necessity Qualifies For Deduction U/S. 80IA Income Tax Act : Bombay High Court

The Court was hearing an appeal filed under the Income Tax Act challenging the order of the Income Tax Appellate Tribunal (ITAT), which had upheld the Assessing Officer’s decision denying the appellant’s claim for deduction under Section 80IA.

A Division Bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla, while deciding the matter, observed: “Where the placement of funds is imperative for carrying on business, the interest derived therefrom has a direct nexus with the business of the undertaking and qualifies for deduction under Section 80IA.”

Advocate P. F. Kaka, Senior Counsel, appeared for the petitioner, while Advocate Akhileshwar Sharma represented the respondents.

Background

The appellant, a joint venture operating a container terminal at Jawaharlal Nehru Port Trust (JNPT) under a Build-Operate-Transfer (BOT) model, had entered into a License Agreement with JNPT, which required periodic replacement of cranes and other key equipment necessary for terminal operations. To meet this contractual obligation, funds were earmarked and placed in fixed deposits to ensure proper planning and timely execution of these replacements.

Separately, the appellant was engaged in a tariff dispute with the Tariff Authority for Major Ports (TAMP). During its proceedings, the High Court had granted interim relief permitting the appellant to continue collecting tariffs at previously prevailing rates and directed that the differential amounts be deposited in fixed deposits until the dispute was resolved.

To comply with both the License Agreement requirements and the interim court directions, the appellant maintained these fixed deposits during the relevant assessment year, from which interest accrued. The appellant then claimed deduction under Section 80IA on this interest income, contending that the deposits were integrally connected to the operations of its eligible undertaking and were not placed for the purpose of parking idle surplus funds.

The Assessing Officer disallowed the claim, treating the interest as “income from other sources.” The ITAT upheld the disallowance, leading to the present appeal before the Bombay High Court.

Court’s Observations

The Court examined the purpose behind maintaining the fixed deposits and held that the funds were not placed voluntarily or as surplus investments but were directly linked to obligations arising from the License Agreement and the tariff dispute.

Relying on earlier Supreme Court and High Court rulings, the Bench noted that where funds are specifically earmarked for business purposes and not placed as surplus or idle investments, the interest earned on such deposits is to be considered for deduction under Section 80IA.

The Bench further observed that the placement of funds was imperative for carrying on business and therefore, the interest earned on such deposits had a direct and proximate nexus with the business of the undertaking.

The Court also noted that the funds placed in the fixed deposits were actually utilised for purchasing cranes and carrying out mandatory equipment replacements, thereby confirming that the deposits were maintained strictly to meet the business obligations arising under the License Agreement.

It further reiterated that the key factor in determining eligibility is whether the placement of funds arises out of contractual or statutory obligations rather than the voluntary deployment of excess funds.

Conclusion

The Court concluded that since the appellant had maintained the fixed deposits to meet its obligations under the License Agreement and to comply with the specific directions of the High Court in the tariff dispute proceedings, the interest earned on those deposits could not be treated as independent income from other sources.

“In these circumstances, in our view, the Appellant is entitled to the deduction under Section 80IA of the Act on the interest earned from fixed deposits which were placed by the Appellant for planning of replacement of equipment as per the provisions of the said License Agreement and due to the tariff dispute.”, the Court observed.

The Court accordingly allowed the appeal and set aside the order of the Income Tax Appellate Tribunal.

Cause Title: Gateway Terminals India Pvt. Ltd. v. Deputy Commissioner of Income Tax, Raigad

Appearances

Petitioners: Advocate P. F. Kaka, Senior Counsel; Advocate Manish Kanth; Advocate Atul K. Jasani

Respondents: Advocate Akhileshwar Sharma

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