Section 80IA of the Income Tax Act, 1961, is a significant tax incentive provision intended to promote the development of infrastructure facilities in India. It grants a 100% deduction of profits and gains derived from eligible businesses engaged in developing, operating, or maintaining infrastructure projects such as ports, roads, airports, and power facilities. However, a persistent question before courts has been whether interest income, particularly from fixed deposits (FDs), can be regarded as profits “derived from” an eligible business.
The Bombay High Court recently addressed this nuanced issue in Gateway Terminals India Pvt. Ltd. v. Deputy Commissioner of Income Tax, Raigad (2025:BHC-AS:36550-DB), where the assessee, operating a container terminal at JNPT, claimed Section 80IA deduction on interest from FDs as well as interest on TDS refunds. The Court’s ruling provides clarity on the interpretation of “derived from business” under Section 80IA and lays down the principles distinguishing eligible business-linked interest from independent income from other sources.
Facts of the Case
- Assessee’s business: Gateway Terminals India Pvt. Ltd. is a joint venture between APM Terminals Mauritius Limited and Container Corporation of India Ltd. It operates a container terminal at Jawaharlal Nehru Port Trust (JNPT) under a Build-Operate-Transfer (BOT) license agreement.
- Business obligations: Under the license, the assessee was required to periodically replace cranes and major equipment to ensure the continuous operation of the terminal. Failure to comply could result in the revocation of the license.
- Fixed deposits: To fulfill this contractual obligation, and also to comply with a Bombay High Court order in a tariff dispute with the Tariff Authority for Major Ports (TAMP), the assessee placed substantial amounts in FDs.
- Interest income: The assessee earned (i) interest on these fixed deposits and (ii) interest on TDS refunds, where customers had wrongfully deducted tax from payments for port services.
- Claim under Section 80IA: Both categories of interest income were claimed as profits derived from the eligible infrastructure business.
Initially, the Assessing Officer allowed the claim, but the Commissioner of Income Tax (Appeals) and later the ITAT disallowed the deduction, treating the FD interest as “Income from Other Sources.” The matter reached the Bombay High Court.
Issues Before the Court
- Whether interest earned on fixed deposits maintained for equipment replacement and tariff dispute obligations forms part of profits “derived from” eligible business under Section 80IA.
- Whether interest on TDS refunds received by the assessee also qualifies for deduction under Section 80IA.
Judicial Reasoning
1. Nature of Interest from Fixed Deposits
The Court distinguished between surplus idle funds parked in banks to earn income and funds compulsorily earmarked for business obligations.
- If funds are placed in FDs merely to earn interest, the income is taxable under “Income from Other Sources.
- If the placement is mandated by a contractual or legal obligation integrally connected with the eligible business, the interest becomes part of business income.
The Court relied on CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC), where it was held that if placement of funds is imperative for carrying on business, the interest income is from business. Similarly, in Indo Swiss Jewels Ltd. (2006) 284 ITR 389 (Bom), interest on deposits kept apart for the purchase of machinery was treated as business income.
Applying these principles, the Court held that the assessee’s FDs were not voluntary investments of surplus funds but were integral to the license conditions and judicial directions. Since the deposits were later used for crane replacement, the nexus with business was direct and proximate.
2. Interest on TDS Refunds
On this issue, the Court observed that:
- TDS was wrongly deducted by customers from payments for port services.
- Such deductions reduced the assessee’s business receipts, and the refund of TDS was essentially a delayed payment of sales income.
- Interest on such refunds, therefore, was an accretion to business income and not an independent income source.
- The Court referred to CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC), where interest awarded for delayed contractual payments was held to be incidental to business income. Similarly, in Hiranandani Builders (ITAT Mumbai, 2017), interest on TDS refunds was allowed under Section 80IA.
Thus, the Court concluded that interest on TDS refunds is eligible for Section 80IA deduction as it directly arises from the business of operating the port.
3. Distinguishing Precedents Against Assessee
The Revenue had relied on Liberty India v. CIT (2009) 317 ITR 218 (SC) and CIT v. Sterling Foods (1999) 237 ITR 579 (SC), which held that incentives like DEPB credits or import entitlements were not “derived from” the business. The Court clarified that those cases dealt with external incentives or post-manufacture benefits, whereas in the present case, the interest was directly linked to the assessee’s business obligations.
Court’s Holding
- Interest from fixed deposits: Eligible for deduction under Section 80IA, since the deposits were compelled by contractual obligations (equipment replacement) and judicial directions (tariff dispute funds), and not mere idle investments.
- Interest on TDS refunds: Also deductible under Section 80IA, as TDS deduction was an integral part of business receipts and interest thereon is an accretion to sales income.
Accordingly, the High Court set aside the ITAT’s order and ruled in favour of the assessee.
Case Laws Landscape
This ruling aligns with a broader judicial trend distinguishing incidental income from independent income:
- CIT v. Shree Rama Multi Tech Ltd. (2018) – Interest on share application money kept in bank due to statutory requirement held incidental and deductible.
- Arul Mariammal Textiles Ltd. v. Assistant CIT (2018) – FD interest linked to margin money for LC in import transactions eligible under Section 80IA.
- CIT v. Indo Swiss Jewels Ltd. (2006) – FD interest for machinery imports treated as business income.
- CIT v. Meghalaya Steels Ltd. (2016) – Subsidies reimbursing business costs held deductible as directly connected with manufacturing.
Conversely, where deposits are made out of idle surplus with no business compulsion, courts have denied deduction, holding such interest to be “Income from Other Sources.”
Key Highlights of the Decision
Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla stated:
In our view, the aforesaid facts clearly show that:
a) The placement of fixed deposits was imperative for the purpose of carrying on the eligible business of the Appellant
b) The placement of fixed deposits is not for parking surplus funds which are lying idle. This is also demonstrated by the fact that the Appellant had used these fixed deposits for purchasing cranes for the eligible business.
c) There is a direct nexus between the fixed deposits and the eligible business of the Appellant.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.
Conclusion
Bombay High Court in Gateway Terminals India Pvt. Ltd. has reaffirmed that interest income closely connected with the conduct of an eligible business under Section 80IA qualifies for a deduction. The ruling distinguishes between incidental business-linked interest and independent investment income, thereby striking a balance between legislative intent and taxpayer rights.
For infrastructure developers and enterprises under BOT/PPP frameworks, the judgment is significant. It ensures that funds earmarked for contractual and regulatory obligations do not lose their character as business income merely because they generate incidental interest. Similarly, it provides clarity that interest on TDS refunds—being part of sales receipts—is deductible.
In effect, the judgment strengthens the scope of Section 80IA, aligning it with the practical realities of infrastructure operations and ensuring that the incentive provision serves its purpose of encouraging infrastructure development in India.
Important Link
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