Commissioner of Income Tax vs South India Shipping Corporation Ltd.

In pursuance of the directions of this court in T.C.P. No. 139 of 1981, dated October 27, 1981, u/s 256(2) of the Income Tax Act. 1961

(hereinafter referred to as ""the Act""), the following question of law is referred by the Income Tax Appellate Tribunal, Madras, for the opinion of

this court :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 3,32,84 representing the

interest from London brokers, other interest and miscellaneous receipts should be treated as income derived from shipping business eligible for

relief u/s 80J of the Income Tax Act, 1961 ?

The relevant facts of the case are as follows : The reference application relates to the assessment year 1972-73. The assessee, South India

Shipping Corporation Limited, is a public limited company carrying on shipping business and it is a resident shipping company. In computing the

relief u/s 80J for the assessment year 1972-73, the Income Tax Officer did not treat as profits derived from the shipping business an income of Rs.

3,32,848 included under the head, ""Business income"" (comprising interest from brokers in London Rs. 1,93,189 plus other interest of Rs. 8,505

plus other miscellaneous receipts of Rs. 1,31,154). The assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate

Assistant Commissioner held that the sum of Rs. 3,32,848 was rightly treated as the assessee''s income under the other sources and excluded from

the business income, holding that it did not directly pertain to the assessee''s business. The assessee preferred an appeal to the Income Tax

Appellate Tribunal, Madras.

The Income Tax Appellate Tribunal, following its own decision pertaining to the same assessee in I.T.A. Nos. 441 to 444 for the assessment

years 1969-70 and 1971-72, held as follows :

Following the Tribunal''s order referred to above, we would hold that the interest from London brokers of Rs. 1,93,189 and the other

miscellaneous receipts Rs. 1,31,154 should be treated as business income eligible for relief u/s 80J out of Rs. 3,32,648 (the balance of Rs. 8,505

not being pressed).

Mr. N. V. Balasubramaniam, learned standing counsel for the Income Tax Department, contended that the Income Tax Appellate Tribunal

erred in holding that a sum of Rs. 3,32,848 representing the interest from the London brokers and other interest and also miscellaneous receipts

should not be treated as income derived from the shipping business and the shipping company is not eligible for the relief u/s 80J of the Act. On the

other hand learned counsel for the assessee-company, Mr. P. P. S. Janarthana Raja, contended that there is no error of law in the order passed by

the Income Tax Appellate Tribunal. In this connection, it is useful to refer to section 80J of the Act which reads as follows :

80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. (1) Where

the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to

which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of

the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee u/s 80HH or section 80HHA)

of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the

industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in sub-section (1A) in respect of the

previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount

of capital employed during the previous year) :

Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to

manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first

brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have

effect as if for the words ''six per cent.'', the words ''seven and a half per cent.'' had been substituted.

(1A) (I) For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise

expressly provided in this section, be compute in accordance with clauses (II) to (IV) and the capital employed in a ship shall be computed in

accordance with clause (V).

In Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa, , the Supreme Court, with reference to the

following question whether, on the facts and in the circumstances of the case, the sum of Rs. 2,77,692 awarded to the assessee as interest was

rightly held to be a revenue receipt, has observed as follows (at page 884) :

The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in

respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The

assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with

the State Government and he has also to reckon with delays in the payment of amounts that are due to him. If the amounts are not paid at the

proper time and interest is awarded or paid for such delay such interest is only an accretion to the assessee''s receipts from the contracts. It is

obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is

totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head ''Income from other

sources'' only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest

receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest

payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and

which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the

assessee under the awards and treated as ''income from other sources. The second question is, therefore, answered in favour of the assessee and

against the Revenue.

In the case of Commissioner of Income Tax Vs. Eastern Seafoods Exports (P.) Ltd., , a Division Bench of this court of which one of us was a

member (Mishra J.), upon the facts of the case observed that the sale of replenishment licences was an act wholly unconnected with the business in

the goods which were either required to be exported or imported for the purpose of the assessee-company. In the absence of any immediate and

direct nexus between the sale of the licences and the assessee''s business activity, the assessee is not entitled to the benefit u/s 80J of the Act.

In a recent Division Bench ruling of this court, in Commissioner of Income Tax Vs. Tamil Nadu Dairy Development Corporation Ltd., (Tax

Cases Nos. 66 and 67 of 1982, dated March 23, 1995) to which both of us were members, with reference to short-term deposits made by the

Tamil Nadu Dairy Development Corporation out of the business funds available with the assessee-company before the same were utilised for

actual business activity were held to be incidental to the business activity of the assessee-company and as such interest on short-term deposits

should be treated as business'' income and it was observed as follows (at page 542) :

In Commissioner of Income Tax, West Bengal Vs. Calcutta National Bank Limited (In Liquidation), , the Supreme Court has observed as follows

:

The term, ""business"" is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high

authority that it is neither practicable nor desirable to make any attempt at delimiting the ambit of its connotation. Each case has to be determined

with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily, ""business"" implies a continuous activity

in carrying on a particular trade or avocation, it may also include an activity which may be called, ""quiescent"".''

Upon the facts of the case, the Supreme Court held that the realisation of rental income by the assessee-bank, was in the course of its business in

prosecution of one of the objects in its memorandum; it was, therefore, liable to be included in its business profits.

Taking into consideration the above rulings of the Supreme Court and of this court, we are of the considered view that a sum of Rs. 3,32,845

representing interest from London brokers, other interest and miscellaneous receipts of the assessee-company should be treated as income derived

from the activity of shipping business and should be treated as business income. In the instant case, the assessees, a public limited company, whose

principal business is shipping and the aforesaid interest amounts are derived from the foreign business activity of the shipping company and there is

a nexus between the shipping business of the assessee-company and accrued interest on the London brokers'' business activity. Further, the

London brokers of the assessee-company are merely carrying on the shipping business of the assessee-company in a foreign country which is

incidental to the principal business of shipping of the assessee-company Accordingly, the income derived by way of interest from the London

brokers of the assessee-company are entitled to the benefit u/s 80J of the Act.

In view of the above, we answer the question referred to us in the affirmative in favour of the assessee and against the Revenue. Upon the facts

and circumstances of the case, there shall be no order as to costs.