TMI Blog2005 (3) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is export business and not that of earning interest on short-term fixed deposits. If the earning of interest is connected with the carrying on of the assessee's business and if the fixed deposits are utilised in such a manner so as to provide a sufficiently perceptible link with the business activities of the assessee, there should be no objection to the treatment of the interest as business income. In the instant case, the deposits in the bank were made with the money received as advance in the export business. The amount so deposited is the amount paid by the foreign buyer by way of advance amount to the assessee for the part performance of the agreement for export of the goods. The assessee, instead of keeping that amount idle, since it did not require the same for its immediate business activity, had deposited that amount by way of short-term deposit in the bank and the amount so deposited is only the funds which it had received towards the export to be made by it and the amounts so deposited in the bank and the interest income derived because of such deposit have close link with the business activity of the assessee-company and therefore, in our opinion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, Bangalore, in I. T. A. Nos. 594-596 of 1992 and 1048, 1049 and 1050 of 1991, for our consideration and opinion. 2. The parties to these proceedings are common. The assessment years are 1986-87, 1987-88 and 1988-89, respectively. 3. In I. T. R. C. Nos. 280, 281 and 282 of 1998, the question of law referred for our consideration and opinion is: Whether, on the facts and circumstances of the case, the Tribunal was right in holding that interest received by the assessee on the surplus funds kept with banks as short-term deposits should be treated as business income? 4. In I. T. R. C. Nos. 284 and 285 of 1998, the following question of law is referred for our consideration and opinion: Whether, on the facts and circumstances of the case, the Tribunal was right in holding that presentations could not be considered to serve the purpose of advertisement of the products of the assessee when there was no logo of the assessee-company attached to the articles presented when rule 6B does not specify that presentation articles carrying the logo of the company only would be treated as serving the purpose of advertisement? 5. In I. T. R. C. No. 283 of 1998, both questions of law which we have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals is of the view, that the interest income was generated by way of keeping the advance amounts received by the assessee during the course of its regular business activity in the form of short-term deposits in the banks and therefore, it cannot be denied that the interest derived from such short-term deposits arose to the assessee during the course of its normal business activity, and therefore, the interest income earned by the assessee has to be considered as business income of the assessee only, and not as income from other sources . 10. In so far as the claim made by the assessee for deduction of certain amounts spent for presentation of the articles to its customers and employees is concerned, the Assessing Officer taking into consideration the language employed in rule 6B of the Rules had rejected the same and in the appeal filed, the Commissioner of Income-tax (Appeals), had allowed the assessee's claim on the ground, that, since no logo of the assessee's-company was attached to the articles presented, and therefore, advertisement of the company or its products was not involved in the presentation of articles and further, the presentation of the articles so made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act which have bearing on the issue require to be noticed. 15. Section 14 of the Act classifies the chargeable income into various heads as distinguished from source of income. The apex court while considering the provisions of section 14 of the Act in the case of Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428 has observed that the provisions of this section are mandatory and therefore, income must be assessed only in accordance with this section. The nature and quality of income would be determined in accordance with commercial considerations, although the same will have to be assessed under a different head. If a receipt falls under one of the specific heads of income, then such receipt can be taxed only in accordance with the provisions relating to that head. However, merely because for some reasons income is not chargeable to tax under the specific head, it cannot be taxed under the residuary category of income from other sources . 16. Section 28 of the Act deals with profits and gains of business or profession. It enumerates different types of income chargeable to income-tax under the head Profits and gains of business or profession . For charging the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income under section 28 of the Act. Where the business of the assessee is to lend money or where the activity is a systematic endeavour to earn interest by lending money or discounting bills of exchange, interest income or the discounting income would be assessable as business income. However, where interest cannot be brought to tax under any other head of income, the same would be assessable under the head Income from other sources . 21. The High Court of Madhya Pradesh in the case of Madhya Pradesh State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 and the Kerala High Court in the case of Collis Line P. Ltd. v. ITO [1982] 135 ITR 390 have observed that where a company after its formation did not carry on any business but merely derived interest income on the share of money received by it, such interest income is assessable as Income from other sources . 22. In the case of CIT v. L T McNeil Ltd. [1993] 202 ITR 662, the Bombay High Court has held that where the business was not set up and interest was earned on capital, the interest income was held to be assessable as income from other sources . 23. In CIT v. South India Shipping Corporation Ltd. [1995] 216 ITR 651 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce the interest payable by the assessee from financial institutions, which would be capitalised after the commencement of commercial production. 29. The apex court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172, while answering the question, has held as under: ...that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d deposits are utilised in such a manner so as to provide a sufficiently perceptible link with the business activities of the assessee, there should be no objection to the treatment of the interest as business income. In the instant case, the deposits in the bank were made with the money received as advance in the export business. The amount so deposited is the amount paid by the foreign buyer by way of advance amount to the assessee for the part performance of the agreement for export of the goods. The assessee, instead of keeping that amount idle, since it did not require the same for its immediate business activity, had deposited that amount by way of short-term deposit in the bank and the amount so deposited is only the funds which it had received towards the export to be made by it and the amounts so deposited in the bank and the interest income derived because of such deposit have close link with the business activity of the assessee-company and therefore, in our opinion, the first appellate authority and the Tribunal were justified in holding that the interest on bank deposits was assessable as business income. 34. To answer the second issue referred for our opinion, some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presentation of articles and gifts by the assessee-company to its customers and employees is only for advertisement and merely because the logo of the company is not affixed on those articles would not make any difference and therefore, both the first appellate authority and the Tribunal were not justified in coming to the conclusion that the presentation of the articles cannot be considered to serve the purpose of advertisement of the products. 39. Per contra, Sri Parthasarathi, learned counsel for the assessee would contend that the advertisement is different from compliment and there is no advertisement of the assessee's products when there is no logo affixed to the articles presented by the assessee to its customers and employees, and therefore, the Tribunal is justified in its findings and conclusion in this regard. In aid of his submissions, learned counsel has relied on the observations made by the Allahabad High Court in the case of CIT v. S. P. Textiles Co. [1990] 185 ITR 272, the observations made by the Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. (No.2) [1990] 183 ITR 611, and the observations made by the Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of fact reached by the Tribunal, the court was pleased to hold that the amount was not spent on publicity or advertisement so as to fall within the provisions of rule 6B of the Rules. 44. The Bombay High Court in the case of CIT v. Allana Sons P. Ltd. [1995] 216 ITR 690, a case where the facts are more or less similar to the present case before us, has observed that where the presentation articles did not bear either the name of the assessee-company nor its logo, such articles could not be considered as meant for advertisement and therefore, rule 6B of the Rules would not be attracted. 45. In our view, having gone through each one of the case law cited by learned counsel for the Revenue, the same are not applicable to the facts and circumstances of the present case. Secondly, in view of the facts noticed by the Tribunal, the provisions of rule 6B of the Rules cannot be applied to the expenditure incurred by the assessee for purchase of articles to its customers and employees. 46. In the result, the questions of law referred for our opinion require to be answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Reference proceedings are disposed of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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