COMMISSIONER OF INCOME-TAX VS MADRAS REFINERIES LTD
1999 P T D 2611
[228 I T R 354]
[Madras High Court (India)]
Before K. A. Thanikkachalam and S. M. Sidickk, JJ
COMMISSIONER OF INCOME-TAX
Versus
MADRAS REFINERIES LTD
T. C. No. 786 of 1982 (Reference No.523 of 1982), decided on 08/01/1997.
Income-tax---
----Business income or income from other sources ---Assessee-company refining petroleum products---In the course of assessee's business assessee receiving money on several counts---Surplus money not immediately required deposited with Banks---Interest received on term deposits with Banks-- Deposit of moneys with Banks interlinked with carrying on of business of assessee---Department accepting claim of assessee to-treat deposit as capital employed for relief under S.80-J, Indian Income Tax Act, 1961---Income earned by capital employed is business income and not income from other sources---Interest income to be assessed as business income---Indian Income Tax Act, 1961, Ss.28 & 56.
The assessee, carrying on business of refining petroleum products, received interest on term deposits with banks. For the assessment year 1974-75, the assessee claimed that the interest was to be assessed as business income. The Income-tax Officer held that the interest received was directly relatable to the deposits made in the banks and such interest had to be assessed as "income from other sources" and it was not profit derived from an industrial undertaking. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal held that the investing of surplus moneys in term deposits was indisputably inter-connected with the carrying on of the assessee's business, that in the course of the assessee's business, the assessee received money on several counts, and that the money not immediately required was always deposited with the banks, which would serve two objectives, namely, one was easy accessibility to the money when needed and the other was earning of an interest which would reduce the cost of borrowing. The Tribunal also observed that the interest could be linked to the interest that the assessee-company charged from its customers on overdue payments, which would also be regarded as business income and never treated as income from "other sources". The Tribunal also found on an analysis of section 56 of the Income Tax Act, 1961, which alone permits taxation of income from "other sources", 'that the language used in that section also supported the view that the income earned by the assessee from deposits could only be taxed as income from "business", because the deposits sprang directly from the carrying on of the business and not de hors it and it was good management of cash to produce the income. Accordingly, the Tribunal reversed the view taken by the Authorities below and directed the Income-tax Officer to treat the interest income as "business income". On a reference at the instance of the Revenue, the assessee contended that since the term deposits were accepted by the Department as capital employed and included the same in the capital base for the purpose of relief under section 80-J of the Income Tax Act, 1961, it would be a contradiction in terms to treat the income earned from the deposits as income from other sources, while the deposits which earned the income had been treated as business assets. The assessee further contended that it had requested the Department to treat the interest income as part of business income in the assessment covering the first year of operation, which was accepted by the Department:
Held, that if the deposit made by the assessee in the bank was capital employed, that would become part of the capital of the new industrial undertaking. Any income earned by the capital employed would automatically become the business income of the assessee and it could not be treated as income earned from "other sources". Therefore, the Tribunal was right in holding that the interest income on bank deposits had to be assessed under the head "business income".
Andhra Pradesh State Financial Corporation Ltd. v. CIT (1984) 150 ITR 533 (AP); Bokaro Steel Ltd. v. CIT (No.2) (1988) 170 ITR 545 (Pat.); CIT v. A.P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 (AP); CIT v. Calcutta National Bank Ltd. (1959) 37 ITR 171 (SC); CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597 (Raj.); CIT v. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535 (Mad.); Collis Line (Pvt.) Ltd. v. ITO (1982) 135 ITR 390 (Ker.);- Murli Investment Co. v. CIT (1987) 167 ITR 368 (Raj.) and Snam Progetti S.P.A. v. CIT (Addl.) (1981) 132ITR 70 (Delhi) ref.
C. V. Raj an for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
K. A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following question, for the opinion of this Court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest on term deposits should be treated as 'business income'?"
The assessee, Madras Refineries Limited, is a public limited company, carrying on business in refining of petroleum products. The assessment year involved in this case is 1974-75 in respect of which the previous year ended on June 30, 1973. During the course of the assessment, the assessee claimed relief under section 80-J of the Income Tax Act, 1961. During the course of the assessment proceedings, for the assessment year 1974-75, the assessee received a total sum of Rs.29,73,601 as interest in the
following manner:
| | | Rs. |
| (a) | Interest on term deposits with banks in India | 29,30,573 |
| (b) | Interest on time deposits with FNCB, New York | 31,844 |
| (c) | Interest on trade deposits with Government securities | 11,184 |
| | Total: | 29,73,601 |
The assessee claimed that its interest income is to be regarded as part of its business income. The Income-tax Officer treated it as income from "other sources". According to the Income-tax Officer, interest received was directly relatable to deposits made in the banks and such interest must be taken as income under the head "other sources" and there was no scope to consider it as profit derived from industrial undertaking.
On appeal, the Appellate Assistant Commissioner confirmed the order passed by the Income-tax Officer. The assessee filed a second appeal before the Appellate Tribunal. Before the Tribunal it was argued that the deposit of these moneys in the banks was so interlinked with the carrying on of the business that it could not be regarded de hors the carrying on of the business and was incidental to and directly sprang from the carrying on of the business and, therefore, the income should be regarded only as income from "business" and not otherwise. The Tribunal held that the investing of the surplus moneys in term deposits was indisputably inter-connected with the carrying on of the assessee's business and that it is very difficult to see its activity as a separate and distinct activity. In the course of the assessee's business, the- assessee received money on several counts. The money not immediately required is always deposited with the banks, which would .serve two objectives: one was easy accessibility of the money when needed and the other was earning of an interest which would reduce the cost of borrowing. The Tribunal also observed that this interest could be linked to the interest that the assessee-company charges from its customers on overdue payments, which would also be regarded as business income and never treated as income from "other sources". The Tribunal also found on an analysis of section 56 of the Income Tax Act, 1961, which alone permits taxation of income from "other sources", that the language used in that section also supports the view that the income earned by the assessee from deposits could only be taxed as income from "business", because the deposits sprang directly from the carrying on of the business and not de hors it and it was good management of cash to produce the income. Accordingly, the Tribunal reversed the view taken by the authorities below and directed the Income-tax Officer to treat the interest income as "business income"
Before us, learned junior standing counsel appearing for the Department submitted that the assessee is doing business in refining of petroleum products. Money-lending or financing is not the business of the assessee. Business is not the source for deposit, which earned the interest income. The interest income is relatable to the deposit made in the bank. Only the profits earned in carrying on the business can be treated ,as "business income". The Tribunal was not correct in stating that earning interest from the bank deposit is the income earned from the business of the assessee. According to learned standing counsel merely because the bank deposit is treated as capital employed, it does not follow that 'interest earned should be treated as income from business, since the assessee is not doing business in money-lending or financing. Therefore, according to learned standing counsel for the Department, the provisions of section 28 of the Act will not apply to the facts of this case and the provisions of section 56 of the Act alone would apply. In order to support his contention; learned standing counsel for the Department relied upon the following decisions:
(1) Murli Investment Co. v. CIT (1987) 167 ITR 368 (Raj.).
(2) CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597 (Raj.).
(3) Bokaro Steel Ltd. v. CIT (No.2) (1988) 170 ITR 545 (Patna).
(4) Collis Line (Pvt.) Ltd. v. ITO (1982) 135 ITR 390 (Ker.).
On the other hand, learned counsel appearing for the assessee submitted as under:
This interest income is in the nature of business income, because it was realised by depositing the cash relating to business, but not immediately required. The term deposits were made in the course of the assessee's business activities and it was nothing but good cash management, which would otherwise retrain idle. By investing the money in fixed deposits for a brief period, the assessee-company was able to reduce its financial burden. The amount of interest realised should, therefore, be regarded as income from business. These deposits were treated as capital employed in the business for the purpose of section 80-J of the Act, and as a consequence, the interest realised should also be treated as business income. The deposit of these moneys with the bank is so inter-linked with the carrying on of the business, that it cannot be regarded de hors the carrying on of the business and is incidental to and directly springs from the carrying on of the business and, therefore, the interest should be regarded as income from business and not from other sources. In order to support his contention learned counsel appearing for the assessee relied upon a decision of this Court in CIT v. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535 (Mad.), CIT v. A.P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 (AP) and Snam Progetti S.P.A. v. Additional CIT (1981) 132 ITR 70 (Delhi). Learned counsel also brought to our notice another judgment of the Andhra Pradesh High Court in Andhra Pradesh State Financial Corporation Ltd. v. CIT (1984) 150 ITR 533.
We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The point for consideration is whether the interest earned on bank deposits made, viz., Rs.29,73,601, can be treated as income "from business". According to the assessee, the bank deposit was made in the course of the business out of the profit earned and the bank deposit is inextricably interlinked with the business of the assessee, and, therefore, the interest income from the bank deposit should be treated as income "from business" especially when this bank deposit was claimed and accepted as capital employed in the new industrial undertaking for relief under section 80-J of the Act. On the other hand, the case of the Department was that the assessee is not doing money lending business or financing business and, therefore, the bank deposit made by the assessee is unconnected with its oil refining business. Hence, the interest earned from bank deposit should be treated as income from "other sources" and not income "from business".
In Collis Line (Pvt.) Ltd. v. ITO (1982) 135 ITR 390, the Kerala High Court, while considering the provisions of section 33 of the Income Tax Act, 1961, held that where money was invested in a bank by the assessee, a shipping company, because the money was lying idle and it was safer and wiser to put it in a bank, the interest earned on the deposit would be incidental to the main purpose of the deposit, which was safe keeping and not earning of profits. Therefore, the interest earned cannot be said to be received in the course of business so as to make it part of the profits and gains of the assessee's business. It should be assessed as income from "other sources".
In Bokaro Steel Ltd. v. CIT (No.2) (1988) 170 ITR 545, the Patna High Court while considering the provisions of section 56 of the Income Tax Act, 1961, held that the surplus money not required for business had been kept in short-term deposits in bank. The bank deposits were not incidental to the business of the assessee, nor were they incidental to the construction of the factory of the assessee. The interest on short-term deposits constituted income of the assessee and it was assessable under section 56 of the Income Tax Act, 1961, as income from "other sources"
In Murli Investment Co. v. CIT (1987) 167 ITR 368 the Rajasthan High Court, while considering the provisions of sections 28, 56 and 57 of the Income Tax Act, 1961, held that the activity indulged in by the assessee did not constitute money-lending business since the assessee merely invested its funds when they were not required. for the time being and, therefore. the interest earned by the assessee was assessable as income from other sources under sections 56 and 57 of the Income Tax Act, 1961, and was not assessable as business income under section 28.
In CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597, the Rajasthan High Court while considering the provisions of sections 28 and 56 of the Income Tax Act, 1961, held (i) interest on fixed deposits and other deposits before the commencement of business is an income from other sources; (ii) income from interest on deposits of surplus money during the construction period is also to be considered as income from other sources; (iii) interest income in respect of surplus money, not required for business and deposited in banks, or with persons as idle money`; for safe keeping, would be assessable as income from other sources; if the income from interest is from a fund which has been brought as surplus capital, it would be assessable as income from other sources; (iv) in respect of investment of surplus fund, "there is divergence" of opinion between different High Courts and the Rajasthan High Court has held that if the surplus funds are invested, instead of keeping them idle, the income- by way of interest should be treated as income from other sources; (v) if the surplus funds emerge out of business regularly carried on by the assessee and with the intention to carry on the business of money-lending the loan is advanced, the income therefrom would be income from business. The intention has to be gathered with reference to all the activities of advancing money, which should be permitted by the objects of the company and also by the resolution of the board of directors to carry on the business of money-lending.
In CIT v. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535, this Court, while considering the provisions of sections 32, 28 and 56 of the Income Tax Act, 1961, following the decision of the Supreme Court in CIT v. Calcutta National Bank Ltd. (1959) 37 ITR 171, held that the term "business" is a word of very wide connotation and by no means determinate in its scope and has to be considered with reference to each particular kind of activity and occupation of the person concerned. Upon the peculiar facts of this case, we are of the opinion that the interest accrued on short-term deposits of the assessee's company, which were made out of the business funds available with the assessee-company before the same were utilised for actual business and as such the same is incidental to the business activity of the assessee-company and as such the interest on the short-term deposits should be treated as business income. According to learned counsel appearing for the assessee the abovesaid decision would be applicable to the facts of this case on all fours. However, learned standing counsel appearing for the Department submitted that the Supreme Court in CIT v. Calcutta National Bank Ltd. (1959) 37 ITR 171, is concerned with the proviso to section 2(5) of the Excess Profits Tax Act, 1940. The definition of "business" under the Excess Profits Tax Act is wider than the definition of that term under the Income-tax Act (section 2(4), section 2(19) of the Act). According to learned standing counsel, the proviso to section 2(5) of the Excess Profits Tax Act is concerned with deemed business. Therefore; according to learned standing counsel, the decision rendered in CIT v. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535 (Mad.); would not be relevant in a case where the subject-matter is under section 2(13) of the Income Tax Act, 1961, which is an inclusive definition. Further, learned standing counsel submitted that the decision in CIT v. Tamil
Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535 (Mad.), was rendered on the peculiar facts available in that case.
In Andhra Pradesh State Financial Corporation Ltd. v. CIT (1984) 150 ITR 533, the Andhra Pradesh High Court held that the surplus realised on the sale of the securities was assessable as business income.
In Snam Progetti S.P.A. v. CIT (Addl.) (1981) 132 ITR 70, the Delhi High Court while considering the provisions of sections 71 and 72 of the Income Tax Act, 1961, held that the assessee had not come from Italy to make bank deposits in India but had come to carry on business, and the income earned by it by depositing the spare funds in banks and earning interest thereon would also be business income and for the purpose of setting off, it could not be treated as separate from business income. Therefore, the loss brought forward from the assessment year 1970-71 had to be set off also against the interest income for the assessment year 1971-72.
In CIT v. A. P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361, the Andhra Pradesh High Court, while considering the provisions of sections 28 and 56 of the Income Tax Act, 1961, has held that the Tribunal was justified in the circumstances of that particular case in holding that the income from deposits should not be taxed as income from other sources but should be treated as income from business.
Thus, a careful reading of the decisions cited supra of the various High Courts, would go to show that the High Courts are not uniform in coming to the conclusion whether the interest earned on deposits, should be assessed under the head "business" or under the head" other sources". Each case has got to be decided on the peculiar facts arising in that case. In the present case, the bank deposit made by the assessee is not merely a deposit, since the said deposit money was not required for business for a temporary period. On the other hand the deposit made by the assessee was claimed as capital employed so as to include the same in the capital base for the purpose of claiming relief under section 80-J of the Act. This claim of the assessee was accepted by the Department. According to the assessee, the deposits have been treated as capital employed in the business for the purpose of section 80-J of the Act in the assessment order under appeal. The assessee, therefore, submits that it would be a contradiction in terms to treat the income earned from these deposits as income from other sources, while the deposits, which have earned income have, thus, been treated as business assets. In fact, the assessee has requested to treat the interest income as part of business income in the assessment covering the first year of operation. The assessee's request was allowed and interest income was treated as part of the business income. The Appellate Assistant Commissioner in I.T.A. No. 177 of 1975-76 in his order, dated January 11, 1977, for the assessment year 1972-73; has held that the moneys kept in term deposits by the company represent moneys required for the assessee's business. Therefore, it was requested that the income should be taxed under the head "business" as returned by the assessee. However, it is the case of the Department that the income earned from the said term deposits and fixed deposits does not really stem from the assessee's business as a new industrial undertaking or rather the income is not attributable to the industrial undertaking and therefore it has to be considered only under the head "other sources". The Department sought to make a distinction between the profits, which are incidental to the carrying on of the business and the profits accruing which can be ascribed per se to the carrying on of the industrial undertaking which is the subject matter in the appeal. The fact remains that the bank deposits were made out (it' the profit earned from the business and were not treated as mere deposits liar earning interest income. On the other hand, a claim was made by the asscssee to treat the said deposit as capital employed for the purpose of getting relief under section 80-J of the Act and the Department accepted the same. In such a case, if the deposit made by the assessee in the bank is capital employed, that would become part of the capital of the new industrial undertaking. Any income earned by the capital employed would automatically become the business income of the assessee and it cannot be treated as income earned from "other sources". Therefore, there is no infirmity in the order passed by the Tribunal in holding that the interest income from bank deposits should be assessed under the head "business income". In that view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.
M.B.A./3008/FC Reference answered