S.V. Mehrotra, Accountant Member — The appeal filed by the asses-see is directed against the order dated November 30, 2005 of the learned Commissioner of Income-tax (Appeals)-XXX, Mumbai, for the assessment year 2001-02. The grounds raised by the assessee are as under :

"1.The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer that the interest income earned from temporary surplus funds relating to overseas projects amounting to Rs. 1,49,20,303 is taxable as income from other sources and not as profits and gains of business or profession.

2.The Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in reducing the appellant's claim under section 80HHB by Rs. 81,17,303 in respect of interest income derived from overseas projects.

3.The Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in not considering deputation charges of Rs. 2,26,328 as business income and in reducing 90 per cent. thereof while computing profits of the business for the purpose of deduction under section 80HHC.

4.The learned Commissioner of Income-tax (Appeals) erred in ignoring the appellant's revised claim for deduction under section 80HHC at Rs. 53,31,535. The learned Commissioner of Income-tax (Appeals) ought to have recognised and considered the appellant's revised computation of deduction under section 80HHC filed with the Assessing Officer vide its letter dated March 26, 2004."

2. The facts in brief are that the assessee-company, in the relevant assessment year, was engaged in the business of project export, physical export, mechanical and electrical contracts, civil construction, rendering technical services, undertaking turnkey projects and property development. The assessee had filed its return of income declaring total income at Rs. 1,10,21,179 after claiming deduction under sections 80HHB, 80HHC and 80G. The assessee had also shown book profit under section 115JB at Rs. 4,12,79,000. The Assessing Officer examined noticed that the assessee had claimed deduction under section 80HHB in respect of interest received on bank deposits aggregating to Rs. 66,30,101 and interest received on margin money aggregating to Rs. 14,87,202, both aggregating to Rs. 81,73,303.

3. He examined first the assessee's claim of the following interest incomes being income from business :

4. The Assessing Officer taking note of the fact that the interest had primarily been earned from temporary surplus funds meant for various overseas projects, which the company had temporarily parked in bank fixed deposits, treated the same as income from other sources. He also treated other interest earned by the assessee on which deduction under section 80HHC was claimed as income from other sources. Thus, the entire interest income earned by the assessee was treated as income from other sources.

5. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer's action relying on the following decisions :

(i) Murli Investment Company v. Commissioner Of Income-Tax [1987] 167 ITR 368 (Raj.).

(ii) MP State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 (MP).

(iii) Collis Line (P.) Ltd. v. CIT [1982] 135 ITR 390 (Ker.).

(iv) Traco Cable Company Ltd. v. Commissioner Of Income-Tax, Ernakulam [1969] 72 ITR 503 (Ker.).

(v) Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd. [2002] 257 ITR 60 (Mad.).

(vi) Commissioner Of Income-Tax v. Gimpex P. Ltd. [2004] 268 ITR 377 (Mad.).

(vii) CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom.).

6. Being aggrieved with the order of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before us.

7. Learned counsel for the assessee, in regard to interest on bank deposits earned with respect to foreign projects, relied on the decisions of the hon'ble Bombay High Court in the cases of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 and Commissioner Of Income-Tax v. Lok Holdings [2009] 308 ITR 356 . As regards the interest received on margin money relating to foreign project, learned counsel for the assessee relied on the decision of the hon'ble Karnataka High Court CIT v. Chinna Nachimuthu Constructions reported in [2008] 297 ITR 70 ; [2008] 170 Taxman 272 and the decision of the hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Koshika Telecom Ltd. [2006] 287 ITR 479 .

8. The learned Departmental representative submitted that admittedly surplus funds were invested in fixed deposits and, therefore, the interest income earned therefrom was income from other sources. He submitted that idle funds were required for business purposes and, therefore, there was no nexus with the business of the assessee. He referred to pages 11 to 17 of paper book, which contains separate profit and loss account in relation to four projects to demonstrate that in all the profit and loss accounts, there were surplus funds. He relied on the decision of the hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, CIT v. Samir Diamonds Exports Ltd. [2000] 245 ITR 548 (Bom), Commissioner Of Income-Tax v. M.F.C Industries Pvt. Ltd. [2001] 248 ITR 249 (Mad).

9. We have considered the rival submissions and perused the record of the case. First we will consider the issue regarding interest received on bank deposits relating to foreign projects amounting to Rs. 66,30,101 and Rs. 30,49,000. Before the Assessing Officer, the assessee had pointed out that investment of temporary funds in securities/assets was a prudent business decision. It was further pointed out that as per the guidelines of the Reserve Bank of India, prior approval of banker for monitoring the project was required for transfer of funds from a project having surplus funds to another project having deficit funds. This approval was given only after monitoring the over all funds flow position of the project. Therefore, if the project had actually temporary surplus funds, it cannot transfer to any other project having deficit funds. In such circumstances, the company had no option but to invest such funds in bank fixed deposits to ensure that the funds were readily available, when required. It is not disputed that these funds were meant, as and when required, only for purposes of foreign projects.

10. Now the issue which crops up for our consideration is whether in view of the decision of the hon'ble Bombay High Court in the cases of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 and Lok Holdings [2009] 308 ITR 356, the surplus fund was inextricably linked with the business of the assessee and thus, assessable as income from business or was a case of surplus funds per se being invested in fixed deposits for earning interest income. In the case of Indo Swiss Jewels Ltd. [2006] 284 ITR 389, inter-corporate deposits were made by the assessee from the surplus fund that was set apart for payment for importing machinery. It was held that the interest earned on the short-term deposits of the money kept apart for the business purposes had to be treated as income earned from business and not as income from other sources. In our opinion, the facts of the present case are akin to the facts as obtaining in the case of Indo Swiss Jewels Ltd. [2006] 284 ITR 389 . Further, in the case of Lok Holdings [2009] 308 ITR 356, the facts were that the assessee firm was engaged in construction business and received monies from the purchasers of flats which it deposited with the bank. The hon'ble Bombay High Court upheld the view of the Tribunal that the entire interest sprang from the business activity of the assessee and not out of any independent activity. This decision, in our opinion, also supports the case of the assessee. The assessee had to keep funds readily available to it for purposes of its projects and, therefore, till the funds were actually required for project activities, the assessee kept the same in fixed deposits for temporary period. It is a case of temporary surplus fund available to the assessee not immediately required for its business purposes which was kept in fixed deposits but nevertheless, the funds were meant only for assessee's construction activities and, therefore, they were inextricably linked with the assessee's activities and hence, assessable as income from business. We, therefore, hold that the interest aggregating to (Rs. 66,30,101 + Rs. 30,49,000) was assessable as business income.

11. Now we will consider the issue regarding interest received on margin money in relation to foreign project amounting to Rs. 14,87,202, learned counsel for the assessee has relied on the decision of the hon'ble Delhi High Court in the case of Koshika Telecom Ltd. [2006] 287 ITR 479. In this case, the facts were that the assessee was engaged in the business of operating cellular mobile telephone services in the states of Uttar Pradesh, Bihar, Orissa and West Bengal. The assessee was required to provide finance and performance bank guarantees to the Department of Telecommunications. In the backdrop of these facts, it was held that the deposit of margin money by the assessee was inextricably linked with the furnishing of bank guarantees by the assessee to the Department of Telecommunication for obtaining a licence.

12. In the present case also, interest has been received on margin money kept with bank for availing of credit facilities. Thus, the interest was inextricably linked to the execution of foreign project and hence, in view of the decision in the case of Koshika Telecom Ltd. [2006] 287 ITR 479 (Delhi), the interest was assessable as business income. We, accordingly, hold that interest income on margin money of Rs. 14,87,202 was assessable as business income.

13. As far as other interest amounting to Rs. 37,79,000 is concerned, the same has rightly been treated as income from other sources as it had been earned on bank fixed deposits, income tax refunds and inter-corporate deposits in connection with the assessee's business. Merely because the interest income was earned in the normal course of business, it could not lead to the conclusion that the interest income is assessable as business income unless the same is inextricably linked with the assessee's business. We, accordingly, uphold the orders of the lower authorities to this extent. Ground No. 1 is partly allowed.

14. Apropos ground No. 2, the assessee had claimed deduction under section 80HHB of Rs. 81,17,303 (being interest received on bank deposits of Rs. 66,30,101 and interest on margin money of Rs. 14,87,202), which was denied by the Assessing Officer for two reasons. Firstly because he had held that the interest was assessable as income from other sources and secondly, interest could not come within the ambit of phrase "profits and gains derived from the business". He relied on the decision of the hon'ble Supreme Court in the case of Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 .

15. We have considered the submissions of both the parties and perused the record of the case. We find that this issue is concluded by the decision of the hon'ble Supreme Court in the case of Liberty India v. Commissioner Of Income Tax [2009] 317 ITR 218. In the present case, the interest is not derived from the project but from the fixed deposits kept with the bank. Thus, admittedly the immediate source of interest is fixed deposits and not from the foreign project. Learned counsel for the assessee has pointed out that in case deduction under section 80HHB is not to be allowed then only net interest is to be excluded. We find considerable force in the alternate argument of learned counsel for the assessee and, accordingly, direct the Assessing Officer to exclude only the net interest income as we have held that interest income is assessable as business income. Ground No. 2 is partly allowed.

16. The other grounds raised in this appeal were not pressed, therefore, they are dismissed as not pressed.

17. In the result, appeal filed by the assessee is partly allowed.

18. Pronounced on 21st December, 2009.