South India Shipping Corporation Ltd. vs Commissioner of Income Tax Commissioner of Income Tax Vs South India Shipping Corporation Ltd.

R. Jayasimha Babu, J.—For the assessment year 1976-77, at the instance of the assessee, the following questions of law have been referred

:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding in paras 4 and 9 that the interest from bank

deposits and interest on loan to others should be assessed under the head ''Other sources'' and not under the head ''Business'' ?

Whether the Tribunal was right in holding in paragraph 7 that the sum of Rs. 3,11,48,040 representing the additional cost incurred due to

exchange fluctuations is capital expenditure u/s 43A and in confirming disallowance of the claim for development rebate thereon ?

For the same assessment year in respect of the assessee''s assessment, the Revenue also having sought a reference, the following questions have

been referred at the instance of the Revenue :

Whether, on the facts and in the circumstances of the case, and having regard to the provisions of Section 57 of the Income Tax Act, 1961, the

Appellate Tribunal was right in holding that the interest paid on overdrafts to the bank should be deducted against the interest on fixed deposit

assessed under the head ''Other sources'' ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the tax paid at foreign ports should

be allowed as a deduction in computing the income of the assessee ?

The assessee is a public limited company engaged in shipping business. For the assessment year 1976-77, it reported an income of Rs.

1,75,79,871 under the head ""Business (shipping) income"". Of that sum, a sum of Rs. 87,51,231 was stated to be income by way of interest

received on short-term bank deposits. The Income Tax Officer treated the income received by the assessee by way of interest on bank deposits as

being taxable under the head ""Other sources"". The interest paid by the assessee on overdrafts obtained by it were treated by him as expenditure

incurred for the purpose of business and was given deduction under that head accordingly.

In appeal, the treatment so accorded to the income received by the assessee by way of interest was affirmed by the Commissioner. The

Commissioner has also affirmed the view of the Income Tax Officer that the interest paid on overdrafts is only to be treated as expenditure for the

purpose of business.

The Revenue and the assessee having carried the matter in appeal to the Tribunal, the Tribunal held that the interest received on bank deposits,

is to be treated as income from other sources and not as income from business. It also held that the additional cost incurred by the assessee due to

exchange fluctuations is capital expenditure and confirmed the disallowance of the assessee''s claim for development rebate. The Tribunal further

held that the interest paid on overdraft to the bank could be set off against the interest received by the assessee on bank deposits, though that

income was, according to the Tribunal to be brought to tax under the head ""Income from other sources"". It further held that the taxes paid by the

assessee in Australia on the freight earned by it in Australia required to be allowed as a deduction while computing the income of the assessee.

The first question which has been referred to us at the instance of the assessee as to whether the interest derived from bank deposits by an

assessee who is engaged in business, and who has business income is required to be treated as business income and not as income from other

sources, is now required to be answered in favour of the Revenue and against the assessee in the light of the recent pronouncement of the Supreme

Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, . We are referring to that

decision of the apex court, at the outset though learned counsel for the assessee placed reliance on several decisions rendered by this court and

other courts earlier, as those decisions to the extent they support the case of the assessee can no longer be treated as good law after the decision

of the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, .

The case before the apex court was brought by an assessee, who had received income on short-term fixed deposits and loans and who had not

yet started business. It was the case of the assessee there that such income could not be taxed under the head ""Income from other sources"". It was

also the assessee''s case there that the interest paid by the assessee on its borrowings are required to be set off, against the interest earned by the

assessee on its bank deposits. It is in the background of those facts that the apex court considered the questions that were raised before it.

After setting out the facts, the court made the following significant observation (page 178) :

In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head ''Income from

other sources'' u/s 56 of the Income Tax Act.

The court then noticed that the argument that was advanced before it for the assessee that the assessee therein had not commenced its business

and, therefore, the income derived from funds borrowed for setting up the factory should be adjusted against the interest payable on the borrowed

funds. The court rejected his arguments and held that (page 178) :

In our judgment neither of the two factors can affect the taxability of the income earned by the company.

The court pointed out that Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified

under six heads (page 178) :

(A) Salaries,

(B) Interest on securities,

(C) Income from house property,

(D) Profits and gains of business or profession,

(E) Capital gains,

(F) Income from other sources.

The court thereafter observed that the computation of income under each of these heads will have to be made independently and separately,

and that there are specific rules of deduction and allowances under each head, and further that no deduction or adjustment on account of any

expenditure can be made except as provided by the Act.

The court then proceeded to state that the basic proposition to be kept in view 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. After pointing out the various ways, in which the funds in the hands of the

company may be invested or used, the court observed that the company may also, as in this case, keep the surplus funds in short-term deposits in

order to earn interest. Such interest will be chargeable u/s 56 of the Act.

Learned counsel for the assessee, however, contended that the decision of the apex court was in the background of the fact that the assessee

therein had not commenced business and, therefore, could not have claimed that the income received on fixed deposits was part of its business

income and, therefore, the law laid down therein is inapplicable to the facts of this case. We do not find it possible to agree with learned counsel

that the law laid down in that case is confined to cases where a company has not commenced business. The court proceeded on the basis that in

the usual course, interest received by the company from bank deposits and loans could only be taxed as income under the head ""Income from

other sources"" u/s 56 of the Act. The assessee''s attempt to claim a right to have its income on bank deposit treated in a different way on the

ground that it had not started business was negatived by that court. The proposition laid down by the court, therefore, is that interest received by a

company which carries on business, from bank deposits and loans could only be taxable as ""income from other sources"" and not as ""business

income"".

Learned counsel for the assessee referred to the judgment of the apex court in the case of Commissioner of Income Tax, West Bengal Vs.

Calcutta National Bank Limited (In Liquidation), , in support of his submissions that the term ""business"" is a word of wide scope and that all

activity carried on in the course of the business are to be regarded as one integrated whole and that, therefore, the income realised from the fixed

deposits of idle funds can only be regarded as business income. The decision of the court does not support the proposition so advanced. The court

therein was dealing with the provisions of the Excess Profits Tax Act, 1940. The court found that the term ""business"" in that Act was wider than

that contained in the Income Tax Act, and found that the Excess Profits Tax Act is not concerned with all kinds of income but only with profits, if

made, beyond the certain standard laid down in the Act. It was in that background that the court held that the rental income realised by the

assessee from property owned by it was required be treated as ""business income"" for the purposes of the Excess Profits Tax Act.

Under the Income Tax Act, the distinct heads under which the income of an assessee is to be classified are set out in Section 14 of the Act.

The income received by an assessee has to be fitted under one or other head having regard to the source from which that income is derived. The

fact that a person carries on business does not lead to the inference that all income received by such a person is business income. The same

assessee can have income which may require to be classified, under more than one head. It is the manner in which the income is derived that is

relevant and not merely the fact that the person is engaged in a business or in a profession.

The decisions of this court and other courts relied upon by learned counsel for the petitioner may now be briefly adverted to in the case of

Commissioner of Income Tax Vs. Tamil Nadu Dairy Development Corporation Ltd., , a Division Bench of this court dealt with a case where the

assessee had derived income from short-term deposit and had claimed that such income be treated as business income. This court relying upon the

judgment of the apex court in the case of Commissioner of Income Tax, West Bengal Vs. Calcutta National Bank Limited (In Liquidation), , held

that the income so derived constitutes business income. In a case concerning this very assessee, at the instance of the Revenue, this court

considered that the question as to whether the interest received by the assessee from its brokers in London who had retained the freight collected

on behalf of the assessee for meeting the various expenditure required to be incurred by him at London could be regarded as business income. The

court held that such income was to be treated as income from business. That decision is reported at Commissioner of Income Tax Vs. South India

Shipping Corporation Ltd., .

In the case of c, the court held that if the deposit made by the assessee in the bank was capital employed as that would become part of the

capital of the new industrial undertaking, and, therefore, any income earned by the capital employed would automatically become the business

income of the assessee, and it could hot be treated as income earned from ""other sources"". The court held that the interest income on bank

deposits had to be assessed under the head ""Business income"". The court, in the course of the judgment, referred to the decision of the Andhra

Pradesh High Court in the case of Commissioner of Income Tax Vs. Andhra Pradesh Industrial Infrastructure Corporation Ltd., and the decision

of the Delhi High Court in the case of SNAM PROGETTI S.P.A. Vs. ADDITIONAL COMMISSIONER OF Income Tax, NEW DELHI-II,

AND OTHERS., , which had taken a view similar to the one taken by this court in the case of Commissioner of Income Tax Vs. Madras

Refineries Ltd., .

All these decisions which have held that the interest received on short-term bank deposits by an assessee carrying on business and having the

business income are not to be treated as income from other sources, but as business income must be held to have been impliedly overruled by the

decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, .

This court in the case of the very assessee, and at its instance, had considered this question as early as in the year 1983, and had rejected the

argument similar to the one raised in this case by the assessee, in T. C. P. No. 108 of 1983, decided on July 18, 1983. The Division Bench of this

court declined to direct the Tribunal to state the case and to refer the question of law, viz., as to whether interest from bank deposits and interest

on loan to others received by the assessee should be under the head ""Other sources"" and not ""Business"", was not a question which was required to

be referred to this court, as the court was of the view that the view that had been taken by the Tribunal that such income could only be brought

under the head ""Income from other sources"" was the right view. In reaching that conclusion, this court referred to the decision of the Calcutta High

Court in Phillips Carbon Block Ltd. Vs. Commissioner of Income Tax, Central, and the decision of this court in the case of c. Those decisions are

in accord with the decision of the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income

Tax, Madras, . It is unfortunate that the decision of the Division Bench was not brought to the notice of the Benches which decided the case of

Commissioner of Income Tax Vs. Madras Refineries Ltd., and the case of Commissioner of Income Tax Vs. Tamil Nadu Dairy Development

Corporation Ltd., .

The decision of the Kerala High Court in the case of Collis Line Pvt. Ltd. Vs. Income Tax Officer, A-Ward, , the decision of the Patna High

Court in the case of Bokaro Steel Ltd. Vs. Commissioner of Income Tax (No. 2), , as also the decision of the Rajasthan High Court in the case of

Murali Investment Co, v. CIT [1987] 167 ITR 368, have similarly laid down that the interest on fixed deposits received by an assessee having the

business income is to be assessed under the head ""Income from other sources"" and not ""Business"".

Counsel for the respondent invited our attention to Section 56 of the Act and submitted that the question of assessing any income under the

head ""Income from other sources"" would arise only if such income is not chargeable to tax under any of the heads specified in Section 14 (items

(A) to (E)) of the Act, and, therefore, unless the income was found to be not capable of being treated as business income, it could not be brought

to tax under the head ""Income from other sources"". As noticed earlier, the income is required to be brought under one or the other heads, having

regard to the manner in which it has been earned, or received, the interest received on bank deposits cannot be treated as profits or gains received

from carrying on business and once it is not capable of being treated as business income, it has necessarily to be treated as income received from

other sources, and taxed accordingly.

Our answer to the first question referred to us, at the instance of the assessee is that the Tribunal was right in holding that the interest from bank

deposits and other interest on loans to others is to be assessed under the head ""Income from other sources"".

The second question that has been referred to us, at the instance of the assessee, has to be answered against the assessee and in favour of the

Revenue as it is no longer res integra. The apex court in its decision in the case of Commissioner of Income Tax, Gujarat Vs. Arvind Mills Ltd.,

and this court in the case of South India Shipping Corporation Ltd. Vs. Addl. Commissioner of Income Tax, , held that the additional cost incurred

due to exchange fluctuations is capital expenditure and not revenue expenditure. The second part of the question is covered against the assessee by

the decisions already rendered in the cases of Commissioner of Income Tax Vs. South India Viscose Ltd., ; Commissioner of Income Tax Vs.

South India Viscose Ltd., and Sivananda Steels Ltd. Vs. Commissioner of Income Tax, , wherein the claim for development rebate in respect of

such additional cost was disallowed.

Coming now to the questions that have been referred to us at the instance of the Revenue, these questions are required to be answered in

favour of the Revenue and against the assessee, in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, , wherein the apex court, inter alia, held that in view of Section 57(iii) of the

Income Tax Act, interest paid on overdraft obtained for the purpose of business could not be deducted from the interest earned on monies kept in

fixed deposits as such income derived by way of interest on fixed deposits was to be taxed under the head ""Income from other sources"".

We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the bank, deducted from the

interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income.

The second question referred to us at the instance of the Revenue, is also required to be answered in its favour, as any tax paid by the assessee

after it had earned income in a foreign country, to the foreign Government, cannot be regarded as expenditure incurred for the purpose of earning

the profit. This court has considered this very question in the case of Commissioner of Income Tax Vs. Kerala Lines Ltd., . That decision was

rendered on a reference from the decision of the Tribunal, which the Tribunal had relied upon for holding in favour of the assessee in this

assessment year. The court referred to the decision of the House of Lords in the case of CIR v. Dowdatt O''Mahoney and Co. Ltd. [1952] 33 TC

259 and the observation of Lord Reid, therein that there is a distinction between money spent to earn profits and money spent out of profits which

have been earned and that Income Tax and excess profits tax payments come within the latter category. The House of Lords had rejected the

argument that a trader has as a matter of fact to pay tax in foreign countries for the purpose of his trade and, therefore, the amount so paid would

constitute expenditure which was required to be allowed as expenditure incurred for the purpose of earning profit. It was pointed out by the court

that taxes are not paid for the purpose of earning profits, but, that they are the application of these profits when made and not the less so when they

are executed by a dominion or foreign Government.

In this case, it was the claim of the assessee that it could not leave the -port in Australia unless it paid tax to the Australian Government on the

freight earned by it in Australia, and, therefore, the expenditure must be regarded as a business expenditure. A similar argument was considered

and rejected by this court in the case of Commissioner of Income Tax Vs. Kerala Lines Ltd., . We are in respectful agreement with the law laid

down in that decision. The tax paid to the Australian Government was from out of the freight earned by the assessee in Australia, and such

payment of tax was not an expenditure which was incurred for the purpose of earning the income out of which the tax was paid. The Tribunal in

this case has allowed the expenditure on the ground that the tax so paid was not a tax on the profits or gains of the assessee, and that it was not

computed as a percentage of the total profits and gains. That fact, though relevant for the purpose of Section 40 of the Act, is not of any relevance

for the purpose of determining the true character of the payment as to whether it is an item of expenditure allowable as a business expenditure or is

an amount paid by the assessee from out of its profits. The Tribunal has misled itself in holding that such payment not being one to which Section

40 of the Act is applicable, the same is required to be allowed as a business expenditure.

The questions referred to us at the instance of the assessee are answered in the affirmative, against the assessee and in favour of the Revenue.

The questions referred to us at the instance of the Revenue are answered in the negative, in favour of the Revenue and against the assessee. The

Revenue is entitled to costs in the sum of Rs. 1,500.