Income Tax | Interest Earned from Deposits Made Under Business Compulsion is Eligible Under Section 80IA : Bombay High Court Rules in Favour of Gateway Terminals

“The interest income derived from funds placed in fixed deposits, owing to mandatory business obligations, cannot be treated as income from other sources—it is intrinsically linked to the eligible infrastructure business under Section 80IA” In a landmark judgment pronounced on August 26, 2025, the Bombay High Court decisively ruled in favour of Gateway Terminals India Pvt. Ltd., holding that interest income earned on fixed deposits placed to meet business obligations, and interest received on TDS refunds due to wrongful deductions by customers, are entitled to deduction under Section 80IA of the Income Tax Act, 1961.

Delivering the judgment in Income Tax Appeal No. 1139 of 2021 and Writ Petition No. 4963 of 2021, a Bench comprising Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla concluded that the interest income in question "has arisen directly out of the obligation of developing, operating and maintaining the port facility" and thus falls within the ambit of profits "derived from such business" under Section 80IA(1).

“Funds Parked Under Judicial or Contractual Compulsion Are Not Idle—They Are a Functional Extension of the Core Business”

The judgment stems from a long-standing dispute involving Gateway Terminals India Pvt. Ltd. (GTIPL), a joint venture between APM Terminals Mauritius Ltd. and Container Corporation of India Ltd., which operates a container terminal at Jawaharlal Nehru Port Trust (JNPT) under a 30-year BOT (Build-Operate-Transfer) license.

For the Assessment Year 2012–13, GTIPL claimed deduction under Section 80IA on interest income earned from fixed deposits made in compliance with two major obligations:

1. Mandatory replacement of cranes under Clauses 8.34 to 8.36 of the License Agreement with JNPT.

2. A High Court order dated July 2, 2012, in a tariff dispute with TAMP, which directed the company to set aside differential tariff collections in deposits, pending resolution.

The company also sought deduction on interest received on income tax refunds, arising due to wrongful deduction of TDS by customers while paying for services rendered at the port.

“A Direct Nexus Exists Between Deposits and the Business of Operating a Port—This Is Not a Case of Idle Investment for Yield”

The High Court rejected the Revenue’s argument that the interest income was from “other sources” and not derived directly from the eligible infrastructure business.

Quoting CIT v. Karnataka State Co-operative Bank, the Court declared: “The placement of such funds being imperative for the purposes of carrying on the business, the income derived therefrom would be income from the assessee's business.”

The Court held that GTIPL’s use of fixed deposits was not a deployment of idle surplus funds for commercial gain, but a necessitated act arising from the license agreement and judicial directions.

The judgment clarified that the “test of direct nexus” was fully satisfied: “There exists a direct nexus between the profits and gains and the business in order to be entitled to the deduction.”

In particular, the Court observed: “It is undisputed that planning for replacement and actual replacement of cranes was a part of the mandatory obligation of the Appellant for developing, operating and maintaining the infrastructure facility.”

“Interest on TDS Refund is an Accretion to Business Receipts—Not an Independent Source of Income”

On the second issue of interest on TDS refunds, the Court adopted the principle laid down by the Supreme Court in Govinda Choudhury & Sons: “If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by it.”

It also relied on the ITAT’s reasoning in Hiranandani Builders, where it was held: “TDS deduction is an integral part connected with the receipt of lease income... and the same cannot be separated from the activity carried on by the assessee.”

Accordingly, the Court ruled: “Interest on TDS refund received by the assessee would be entitled to the deduction as it is directly and inextricably linked to the eligible business.”

“Legislative Intent of Section 80IA is to Promote Infrastructure—Denying Deductions on Such Interest Would Frustrate That Purpose”

The Revenue, citing Liberty India v. CIT, argued that interest income must emanate directly from the business and not from a separate stream like deposits. But the Court decisively distinguished that precedent:

“In Liberty India, the source of income was a government incentive scheme. Here, the source of income is business funds that are mandated to be set aside—either by contract or by a court order.”

The Court reiterated that:

“Section 80IA applies not just to narrow profits from sale of goods or services, but to profits and gains derived from the entirety of business activity that forms part of developing, operating and maintaining the infrastructure facility.”

It held that where interest income is a byproduct of essential business activity, and not a freestanding commercial venture, the assessee is entitled to deduction under Section 80IA.

Business Compulsion Makes All the Difference Summing up the principle, the Court observed:

“If the placement of funds is imperative for the purpose of carrying on business, the interest income derived therefrom would be income from the assessee’s business and entitled to deduction.”

Thus, the Bombay High Court allowed both the Income Tax Appeal and the Writ Petition, setting aside the findings of the ITAT and directing that GTIPL be granted deduction under Section 80IA for:

• Interest earned on fixed deposits kept for crane replacement and court-ordered tariff compliance

• Interest on income tax refunds received due to wrongful TDS deductions

Date of Decision: August 26, 2025