Commissioner of Income Tax vs Gimpex P. Ltd.

V.S. Sirpurkar, J.—Two questions are referred to us. They are,

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee is entitled to weighted

deduction u/s 35B on foreign travel, advertisement, foreign branch expenses, etc., though the assessee was only purchasing goods from China and

selling the same in USA and no export of Indian goods was carried on ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the interest received by the assessee from the

fixed deposit of surplus funds should be assessed under the head ''Business'' ?

We shall take the first question first. The Tribunal has held in favour of the assessee on the basis of its earlier orders for the assessment years

1981-82 and 1982-83. The case of the Department is, however, that the assessee is not exporting any goods and admittedly the goods are being

purchased in China and sold in U.S.A. and, therefore, if the goods are not being exported ex-India, the benefits u/s 35B would not be available.

The question is no more res integra. The Supreme Court in the decision reported in CIT v. Bombay Burmah Trading Corporation [2000] 242 ITR

298 has observed (page 301) :

The Tribunal''s reading of the section that the export should be ex-India is not supported by the language of the provision or any authority. The

High Court has, therefore, rightly concluded that to avail of the benefit of weighted deduction the provision does not require that the export should

be ex-India ...

The question before the apex court was as to whether the High Court was right in holding in favour of the assessee and giving the benefit of

Section 35B though the company which was an Indian resident company was carrying on the business of exporting tea. It had incurred certain

expenditure on export of tea from East Africa to the U. K. This claim was disallowed by the Income Tax Officer stating that Section 35B would

apply only if the exports were made from India. The High Court answered this question in the affirmative that is in favour of the assessee and

against the Revenue and as has been pointed out earlier, the apex court has also confirmed the finding and the reasoning of the Bombay High Court

in that case. Thus, the only ground on which the Department questions the order of the Tribunal is that the exports are not ex-India in this case. The

question having been directly answered by the Supreme Court against the Department and in favour of the assessee, the reference is answered

accordingly in so far as the first question is concerned.

The second question is also more or less covered by the Supreme Court decision, but against the assessee. Here the assessee had made some

short-term deposits and had earned interest therefrom. The question was as to whether the interest was to be treated as ""business income"" or was

to be treated as the ""income from other sources"". It seems that the Tribunal has held in favour of the assessee by holding it as ""business income"" on

the basis of its earlier order passed for the assessment years 1981-82 and 1982-83. The senior standing counsel for the Department, Mrs.

Venkatraman, however, pointed out that the Tribunal has gone completely wrong in holding this as an income from the business inasmuch as this

question has been concluded by the Supreme Court''s decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs.

Commissioner of Income Tax, Madras, where an identical question fell for consideration. Learned counsel after painstakingly taking us through that

judgment invited our attention to the observations on page 179 to the following effect :

The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one

of which will be chargeable to Income Tax. Profits and gains of business or profession is only one of the heads under which the company''s income

is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of

business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the

company, even before it commences the business, invests the surplus funds in its hands for purchase of land or house property and later sells it at

profit, the gain made by the company will be assessable under the head ''Capital gains''. Similarly, if a company purchases a rented house and gets

rent such rent, will be assessable to tax u/s 22 as income from house property. Likewise, a company may have income from other sources. It may

buy shares and get dividends. Such dividends will be taxable u/s 56 of the Act. The company may also, as in this case, keep the surplus funds in

short-term deposit in order to earn interest. Such interest will be chargeable u/s 56 of the Act.

In this case, the company had not started its business and invested Some amount in short-term deposit from which it earned interest. However,

the contention raised was that this was the income out of the business and not otherwise. There was a basic argument made in this case that the

Supreme Court had made these observations in the light of the fact that the company had not yet commenced the business. However, it is obvious

that the Supreme Court had not made these observations in the light of those facts but independently thereof to strengthen out the legal position.

The said judgment was followed by a Division Bench of our High Court in a matter reported in South India Shipping Corporation Ltd. Vs.

Commissioner of Income Tax, . The learned judges after taking stock of various decisions came to the conclusion that all those decisions stood

impliedly overruled by the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, . The

learned judges also noted that the question was considered in case of the very same assessee, viz., South India Shipping Corporation Ltd. way

back in the year 1983 wherein the court had come to the conclusion in T. C P. No. 108 of 1983 decided on July 18, 1983, that the view taken by

the Tribunal that such income is only be brought under ""income from other sources"" was the right view. In fact then the court had also referred to

the decision of Phillips Carbon Block Ltd. Vs. Commissioner of Income Tax, Central, and ADDITIONAL COMMISSIONER OF Income Tax,

MADRAS-I Vs. MADRAS FERTILISERS LTD., . The learned judges have also commented that these three decisions were in accord with

Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, , and that it was unfortunate that they were not

brought to the notice of the High Court and the court has therefore held that the Tribunal was right in holding that the interest from the bank

deposits and other interest on loan to others is to be assessed under the head ""Income from other sources"". Situation is no different here and we

have already pointed out that the assessee here has invested amounts in the short-term deposits and has earned an income therefrom. We see no

reason to take any different view from the one which has been taken by the Division Bench in South India Shipping Corporation Ltd. Vs.

Commissioner of Income Tax, . In that view we answer the second question against the assessee and hold that the interest received by the

assessee from the fixed deposit of surplus funds cannot be assessed under the head ""Income from business"". The reference is answered

accordingly.