TMI Blog2005 (3) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? In I. T. R. C. No. 283 of 1998, both questions of law which we have noticed earlier would arise for our consideration and opinion. The relevant facts are: The assessee is a private limited company engaged in the business of export of processed food items. The assessee had received some amounts from its foreign customers by way of advance in respect of the exports to be made by it. The advance amounts so received were kept by the assessee in short-term deposits with the banks and had received interest income out of those deposits. The assessee had treated the interest receipts on the short-term deposits made in the bank as a part of business income and had claimed deduction under section 80HHC of the Income-tax Act 1961 ( the Act f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 is for maintaining better relationship with its customers and employees and therefore, the assessing authority was not justified in disallowing the claim made by the assessee. On the same reasoning, the Tribunal has also rejected the issue raised in this regard in the appeals filed by the Department. In these reference proceedings, the issues that require to be decided are, whether the interest income received by the assessee on the surplus funds kept with the banks as short-term deposits should be considered as income of the assessee from business or income from other sources? Secondly, whether the presentation of articles by the assessee-company to its custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 . 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 income under this head, the considerations that require to be fulfilled are, there should be a business or profession; the business or profession should be carried on by the assessee; and the business or profession should have been carried on by the assessee at any time during the previous year. All business receipts are not income and the real nature of the receipts has to be examined to find out whether it constitutes business income. If a transaction is in the assessee's ordinary line of business, there can be no difficulty that it is in the nature of trade but a difficulty would arise, where the transaction is outside the assessee's line of business. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 . 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 . In CIT v. South India Shipping Corporation Ltd. [1995] 216 ITR 651, the Madras High Court has held that where there is nexus between the interest earned and the business activity of the assessee, the interest income would not be assessable as income from other sources, but would be taxable under the head Income from business and profession . In CIT v. Madras Refineries Ltd. [1997] 228 ITR 354, the Madras High Court while answering the specific issue, whether the interest on term deposits should be treated as business income, the court keeping in view the facts and circumstances of the case, has observed that the deposit made by the assessee in the bank is the capital employed, and that would become part of the capital of the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly, any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. The gist of the aforesaid decision is, that where the assessee derived interest from borrowed funds invested in short-term deposits prior to the commencement of business, the said interest need not be utilised for discharging liability for payment of interest or borrowals, hence the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osit 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. To answer the second issue referred for our opinion, some of the provisions of the Income-tax Act and the Rules framed thereunder require to be noticed. Section 37(3) of the Act provides for allowable deductions on expenditure incurred by the assessee on advertisement, or on maintenance of any residential accommodation including any accommodation in the nature of guest-house or in connection with travelling by an employee or any other person including hotel expenses or allowances paid in connection with such travelling to the extent and subject to conditions prescribed under the rules, wholly and exclusively for the purpose of business. Rule 6B of the Rules deals with expenditure on advertisement. Sub-rule (1) of rule 6B o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT v. Allana Sons P. Ltd. [1995] 216 ITR 690. In our view, the reliance placed by learned counsel Sri Seshachala on the decision of the apex court in the case of Smith Kline and French (India) Ltd. v. CIT [1996] 219 ITR 581, would not assist the Revenue in any manner. That was a case where the Supreme Court, apart from others, was considering the claim of the assessee with regard to deductibility or otherwise of surtax levied on the profits of a company is deductible under section 40(a)(ii) of the Act. The conclusion of the court was that the liability to pay surtax is held to be not deductible as a business expenditure under section 37 of the Act. In Eskayef v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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