Bombay High Court Allows Section 80-IA Deduction on Interest Income | Holds Fixed Deposit and TDS Refund Interest as Inextricably Linked to Port Infrastructure Business
Sanchayita Lahkar
The High Court of Judicature at Bombay Division Bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla held that the Revenue was directed to grant deduction under Section 80IA of the Income Tax Act, 1961 on business income in the nature of interest from fixed deposits with banks and on interest on TDS refunds. The Court set aside the order of the Income Tax Appellate Tribunal (ITAT) that had earlier denied such deductions and allowed the appeal filed by the appellant company. The Court stated that the appellant was entitled to claim deductions on the said interest incomes as they were directly linked to its business of operating and maintaining an infrastructure facility.
The matter arose from the assessment proceedings for the Assessment Year 2012-13. The appellant company was a joint venture between APM Terminals Mauritius Limited and Container Corporation of India Limited, a government undertaking. The appellant was engaged in the business of operating and maintaining a container terminal at Jawaharlal Nehru Port Trust (JNPT). This activity qualified as an eligible business under Section 80IA of the Income Tax Act, which provides tax incentives for developing, operating, and maintaining infrastructure facilities.
During the relevant assessment year, the appellant earned interest income from two sources. First, the company had parked funds in fixed deposits with banks. These funds were earmarked for two business-related purposes: the replacement of cranes and other major container handling equipment as mandated under its License Agreement with JNPT, and compliance with the Bombay High Court’s interim order in a tariff dispute with the Tariff Authority for Major Ports (TAMP). Second, the appellant received interest on TDS refunds, arising from excess tax deducted at source by its customers.
The Assessing Officer initially accepted the appellant’s claim that the interest income from fixed deposits was part of business income eligible for deduction under Section 80IA. However, the Commissioner of Income Tax (Appeals) [CIT(A)] issued an enhancement notice and disallowed the deduction, holding that the interest income from bank deposits was not income derived from the industrial undertaking. The ITAT later affirmed the CIT(A)’s decision and also dismissed the appellant’s miscellaneous application seeking rectification of the order. Aggrieved, the appellant filed an appeal before the High Court challenging these findings.
The appellant contended that the placement of funds in fixed deposits was compelled by contractual obligations under the License Agreement and judicial directives in the tariff dispute. The interest income thus arose out of business compulsions and had a direct nexus with the eligible business. It was further argued that interest on TDS refunds represented compensation for delayed payment of business receipts and should also qualify for deduction under Section 80IA. Reliance was placed on several Supreme Court and High Court precedents that allowed deduction of interest income when linked to business obligations.
On the other hand, counsel for the Revenue argued that the expression “profits and gains derived from an eligible business” under Section 80IA restricted deductions to profits directly generated from the business activity, not ancillary or incidental incomes. According to the Revenue, interest earned from bank deposits represented deployment of surplus funds and could not be considered as profits derived from the industrial undertaking. The Revenue relied on the Supreme Court decision in Liberty India v. CIT and other judgements to assert that deductions were confined to income having a first-degree nexus with the industrial activity.
The High Court examined the facts, the statutory framework under Section 80IA, and the judicial precedents cited by both parties. The Court noted that under the License Agreement with JNPT, the appellant was under a binding obligation to replace cranes within specified timelines, failing which the license could be revoked. It also observed that the placement of deposits was not voluntary but necessitated by judicial directions relating to disputed tariff collections. Financial records showed that the appellant redeemed fixed deposits in subsequent years for the actual purchase of cranes, thus demonstrating that the funds were indeed tied to its business obligations. Similarly, the Court found that the interest on TDS refunds was inseparably connected with the appellant’s business receipts and could not be divorced from the income generated by the eligible business.
The Court stated that “if placement of funds is imperative for the purposes of carrying on the business, the interest income derived therefrom would be income from the assessee’s business and entitled to deduction.” It recorded that the deposits made by the appellant were compelled by the terms of the License Agreement and the order of the Court in the tariff dispute. Therefore, they could not be equated with idle surplus funds.
On the issue of interest on TDS refunds, the Court observed that “the TDS was wrongly deducted by the vendors/customers of the Appellant from the payment made to the Appellant for using the port facility and, therefore, the TDS wrongly deducted was directly a part of the sales receipt of the Appellant.” The Court further recorded that “the TDS refund received by the Appellant is an integral part connected with the receipt of business income by the Appellant and the same cannot be separated from the business of the Appellant.”
Referring to earlier decisions, the Bench quoted the Supreme Court in CIT v. Shree Rama Multi Tech Ltd. stating, “if there is any surplus money which is lying idle, and it has been deposited in the bank for the purpose of earning interest, then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the primary purpose of doing the act in question which resulted into accrual of some additional income, then the income is not liable to be taxed and is eligible to be claimed as a deduction.” Applying this principle, the Court held that the interest earned by the appellant was incidental to business compulsions.
The Court distinguished the Revenue’s reliance on Liberty India, stating that the incentives considered in that case, such as duty drawback and DEPB credits, were policy-driven benefits one step removed from the industrial activity. In contrast, in the present case, the interest incomes had a direct nexus with the appellant’s eligible business operations. The Court recorded that “the facts in Liberty India are distinguishable from the present case, where the interest sought as the deduction is derived directly from the eligible business of the Appellant.”
The Court also referred to the decision of the ITAT in ITO v. Hiranandani Builders, which had held that TDS refund interest was akin to delayed business receipts and hence deductible under Section 80IA. The Bombay High Court had affirmed that judgement in appeal, and the Bench noted that it was in agreement with that view.
The Court concluded by partly setting aside the impugned order of the ITAT dated 28th May 2020. It held: “The Appeal is hereby allowed and the impugned Order dated 28th May, 2020 of the ITAT is partly set aside.” The Court further directed: “The questions of law are answered in the negative i.e. in favour of the Appellant and against the Revenue.” It explicitly ordered: “The Revenue is directed to grant deduction under Section 80IA of the I.T. Act to the Appellant on business income in the nature of interest from fixed deposits with the bank and on interest on TDS refund for the A.Y. 2012-13.” Finally, the Court stated: “In the facts and circumstances of the case, there will be no order as to costs.”
With regard to the writ petition challenging the ITAT’s dismissal of the miscellaneous application, the Bench recorded that since the appeal was allowed and the ITAT’s order was set aside, the writ petition no longer survived. It held: “Since, in the judgement passed in Income tax Appeal No.1139 of 2021, we have allowed the Appeal, partly set aside the impugned Order dated 28th May, 2020 and answered the questions of law in favour of the Appellant, this Writ Petition does not survive and therefore is disposed of as infructuous.”
Advocates Representing the Parties
For the Petitioners: P. F. Kaka, Senior Advocate, with Advocate Manish Kanth instructed by Advocate Atul K. Jasani
For the Respondents: Advocate Akhileshwar Sharma
Case Title: Gateway Terminals India Pvt. Ltd. v. Deputy Commissioner of Income Tax
Neutral Citation: 2025:BHC-OS:14175-DB
Case Number: Income Tax Appeal No. 1139 of 2021 with Writ Petition No. 4963 of 2021
Bench: Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla
