2005 (1) TMI 93 - HC - Income Tax

Income under the head business income Or Income from other sources - receipt of the sale proceeds of empty bags and interest on F. D.- calculation of profit of the assessee s business at the estimated rate of net profit adopted for the purpose - HELD THAT - In our opinion the income earned by way of interest on short-term deposit (FDR) by an assessee has to be taxed as an income chargeable under section 56 of the Act i.e. income from other sources in view of the facts emerging from statement of facts. Though the issue before the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. 1997 (7) TMI 4 - SUPREME COURT was slightly different yet some of the observations made by the Supreme Court while deciding the said case cannot be ignored by this court as being even obiter. Since even the obiter of the Supreme Court is binding on us we are inclined to rely upon the said observations of the Supreme Court for answering the question regarding income earned out of interest against an assessee. Thus we cannot hold that interest earned by an assessee is their business income. In the first place it is not their main or ancillary business. Secondly no memorandum of association is filed or relied upon to show that t0e assessee in addition to its main business of civil construction etc. are also engaged in some kind of money-lending or deposit business with their surplus funds. We cannot ignore the pointed observations and/or findings of the Supreme Court quoted supra on the ground that it was made in altogether different context and hence the same is liable to be ignored. On the other hand we are inclined to respectfully follow being a law laid down by the Supreme Court on the subject holding the field. Thus we hold that income earned by the assessee on their finds invested in short-term deposits in order to earn interest is not to be treated as their business income but it is chargeable to tax u/s 56 of the Act as an income from other sources. Income earned by the assessee by sale of empty bags containers and drums - It is incidental to the business activity and hence in our view any income earned by sale of these empty bags/containers/drums cannot be said to be an income from other sources but it is an income from the business activity of the assessee. Thus income earned by sale of empty bags/containers/drums is a business income and hence liable to be taxed as such. So the reference is answered partly in favour of the assessee and partly in favour of the Revenue i.e. partly against the assessee and partly against the Revenue as indicated supra.

Summary

Issues Involved:
The judgment involves determining the tax treatment of income earned by the assessee from interest on fixed deposit receipts and sale of empty bags, containers, and drums. The main issues are whether such income should be considered as business income or income from other sources under the Income-tax Act, 1961.

Income from Interest on Fixed Deposit Receipts:
The court held that income earned by the assessee from interest on short-term deposit (FDR) is to be taxed as income from other sources under section 56 of the Act. This decision was influenced by the Supreme Court's observations in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172, emphasizing that interest received from bank deposits is taxable under the head 'Income from other sources'. Despite arguments citing High Court authorities, the court relied on the Supreme Court's position, concluding that interest earned by the assessee does not qualify as business income.

Income from Sale of Empty Bags, Containers, and Drums:
Regarding the income generated from the sale of empty bags, containers, and drums, the court determined that since these items are used in the assessee's main business activities, specifically in civil works contracts, the income from their sale is considered part of the business income. The court emphasized that such sales are connected to the business activities and are incidental to the main business, thus categorizing the income from these sales as business income rather than income from other sources.

Conclusion:
The court partially ruled in favor of the assessee and partially against the Revenue. It clarified that income from interest on FDR is to be taxed as income from other sources under section 56 of the Act, while income from the sale of empty bags, containers, and drums is deemed as business income. The judgment provides a clear distinction between the tax treatment of different types of income earned by the assessee, based on the nature and connection of the income to their business activities.