The Commissioner of Income Tax vs V.S. Dempo and Company Ltd.

A.S. Gadkari, J.

The aforesaid appeals preferred by the Revenue Department under Section 260-A of the Income Tax Act, 1961, involves common question of law and therefore are decided together by this common judgment. The aforesaid appeals came to be admitted by order dated 27/11/2006 on the following substantial questions of law:

"(A) Whether on the facts and in the circumstances of the case the ITAT was justified in law in holding that interest income earned by the assessee was in the nature of business income, though assessee has not shown any nexus to prove that it was earned in the course of their Export business, in order to claim deduction u/s. 80HHC?

(B) Whether on the facts and in the circumstances of the case the ITAT erred in treating the interest earned on Bank deposit, Intercorporate deposit, call money deposit, debentures and interest received from Income Tax Department, as business income for the purpose of computing deduction u/s. 80HHC?"

The present appeals are pertaining to Assessment Years 1991-1992 to 1995-1996 of the Respondent/Assessee Company. The Respondent/ Assessee Company is engaged in the business of export of iron ore, cashew kernels and marine products and also deals in auto accessories and general merchandise. As per the record, the company''s Memorandum and Articles of Association in its object clauses (55) and (82) permit the Company to lend, advance or deposit the money as part of the business activities. The Assessee contended that, in pursuance to the object clauses of the Memorandum and Articles of Association, the Assessee carries out money market operation as one of its business activities.

The record discloses that, the Assessment Officer by its orders of different dates relating to the Assessment Years 1991-1992 to 1995-1996 has held that the interest income earned by the Assessee as the "income from other sources" and not as "income from business" and thereby declined to give benefit for the purpose of computing deduction as contemplated under Section 80HHC of the Income Tax Act, to and in favour of the Assessee.

The Respondent/Assessee feeling dissatisfied by the Assessment Orders passed by the Assessment Officer preferred appeals before the Commissioner of Income Tax ( Appeals ) who in turn held that the "income from the interest" earned by the Assessee is the " business income" and not the "income from other sources" and gave the necessary statutory benefits to the Respondent/Assessee.

The Revenue Department feeling aggrieved by the said orders passed by the Commissioner of Income Tax ( Appeals ) preferred different appeals before the Income Tax Appellate Tribunal, which in turn held that the income from the interest earned by the Respondent/Assessee is a "income from business" i.e. business income and not "income from other sources". The Income Tax Appellate Tribunal upheld the orders of the Commissioner of Income Tax (Appeals ) on that point.

The Revenue Department feeling aggrieved and dissatisfied by the said orders precisely dated 21.12.2005 and 30.12.2005 passed by the Income Tax Appellate Tribunal has preferred the present appeals. As stated herein above, the present appeals are admitted on the aforesaid substantial questions of law mentioned in para 1 herein above.

Heard Ms. Asha Desai, learned counsel appearing for the appellant Revenue Department and Shri Mihir Naniwadekar, learned counsel appearing for the Respondent/Assessee at length and also perused the records minutely.

The learned counsel appearing for the appellant has submitted that the Respondent/Assessee is in the habit of investing surplus funds in bank deposits and inter-corporate deposits. She submitted that there are instances that the Respondent/Assessee has made long term investments and also investing the said funds for last so many years. That makes it clear that it is an excess fund which is not required for business purpose of the Assessee. If it is surplus and excess funds which are invested, the same cannot be treated as having nexus with the business of the Assessee. She, therefore, urged before us that the findings recorded by the Commissioner of Income Tax ( Appeals ) and the Income Tax Appellate Tribunal are incorrect and wrong. She submitted that taking into consideration the investment made by the Assessee, the interest earned on the said investment should be treated as the "income from other sources" and not as "business income". She further submitted that it is the Assessee who has utterly failed to show any nexus about the said investments made by it with its business activities and, therefore, the Assessee is not entitled to claim deduction under Section 80HHC of the Income Tax Act. She urged before this Court that the present appeals may be allowed.

The learned counsel appearing for the appellant i.e. Revenue Department relied on the following judgments.

(i) Godavari Sugar Mills Ltd. Vs. Commissioner of Income Tax,

Godavari Sugar Mills Ltd. V/s. Commissioner of :6: Income-Tax,

(ii) (2012) 213 TAXMAN 320 (DELHI)

M/s. Bharti Televentures Ltd. V/s. Addl./Jt. Commissioner of Income Tax, and

(iii) (1982) 29 CTR 35 (KER) : (1982) 9 TAXMAN 129 (KER)/nfcitation>

Collis Line Pvt. Ltd. V/s. Income Tax Officer, A-Ward, Companies Circle, E.

Shri Naniwadekar, learned counsel appearing for the Respondent/Assessee submitted that there is no error at all either on facts or on law, committed by the ITAT and whatever has been argued by the learned counsel appearing for the appellant constitute only the question of fact and does not involve any question of law. While supporting the orders passed by the Income Tax Appellate Tribunal, he submitted that, it is not disputed that for last many years the Respondent/Assessee is earning interest on fixed deposits and inter- corporate deposits or investments in the call money deposits. He further submitted that even the Assessing Officer in the Assessment Order relating to 1991-1992 has recorded a finding that the Assessee is investing surplus funds in the call money markets or short term deposits in various banks and the same is utilized for providing security for obtaining short term loans or as a deposit towards LC opening. He submitted that this shows that the deposits made by the Assessee is having direct nexus with the business of the Assessee. The learned counsel for the Respondent/Assessee further submitted that it is the one of the business activities of the Assessee. He contended that in pursuance of the object clauses of the Memorandum and Articles of Association, the Assessee carries out money market operations as one of its business activities. He further contended that the money which has been invested by the Assessee in the banks has direct nexus with Letters of Credit taken out by the Assessee. He, therefore, submitted that the interest earned on the said deposits for taking out Letters of Credit is incidental to the main purpose and, therefore, it has to be treated as "income from business. He contended that the said interest earned by the Respondent/Assessee does not arise from any other source as has been held by the Assessing Officer. He lastly contended that the interest income earned by the Respondent/Assessee falls within the purview of the expression "business income" as per the explanation (baa) to Section 80HHC. Shri Naniwadekar submitted that the authorities relied upon by the learned counsel appearing for the appellant have no application in view of the facts of the present cases. He contended that the present cases involve a mixed question of facts and law and, therefore, urged before us that the present appeals may be dismissed. He further submitted that the law in respect of the meaning to be given to the interest income as to whether it is business income or income from other sources is well settled by the various judgments, either of the Supreme Court or High Courts.

The learned counsel appearing for the Respondent/Assessee has relied upon the following judgments :

(i) Commissioner of Income Tax Vs. Lok Holdings,

[A] Commissioner of Income Tax V/s. Lok Holdings,

(ii) 1992 AIR 377 : 1991 SCR Supl. (2) 312

Radhasoami Satsang V/s. Commissioner of Income Tax,

(iii) The Commissioner of Income Tax Vs. Dalmia Promoters Developers Pvt. Ltd.,

Commissioner of Income Tax V/s. Dalmia Promoters Developers P. Ltd.,

(iv) Commissioner of Income Tax Vs. Tamil Nadu Dairy Development Corporation Ltd.,

Commissioner of Income Tax V/s. Tamil Nadu Dairy Development Corporation Ltd., and

(v) Commissioner of Income Tax Vs. Paramount Premises (P.) Ltd.,

Commissioner of Income Tax V/s. Paramount Premises (P.) Ltd.

The record reveals that the Assessee has received interest in the respective previous years on FDR in the banks and inter- corporate deposits. The Assessing Officer treated the interest income under the head "income from other sources" and excluded from the head "profits and gains of business or profession". The Assessing Officer was of the view that the Assessee is having surplus funds available which Assessee was investing in the call money deposit/short term deposit in various banks and only as and when it is required for providing security, the Assessee is availing/furnishing the said deposit as security for obtaining short term loans or as a deposit towards LC opening. That the entire deposits to a large extent were being renewed period after period and year after year and the Assessee is earning interest for years together on the said deposits. That the Assessing Officer has further held that as the Assessee was having surplus money, which has not been used for business purpose, the money was kept for earning interest and the interest earned by the Assessee cannot be treated as a business income. The learned counsel appearing for the appellant Revenue Department has supported these findings of the Assessing Officer and has relied on the aforesaid citations in support of her contentions.

(i) The first judgment relied upon by the learned counsel appearing for the appellant is in the case of Godavari Sugar Mills Ltd., V/s Commissioner of Income Tax ( supra ). The Assessing Officer has also after relying on the same has reached to the conclusion that the interest income of the Assessee is "income from other sources". In the case of Godavari Sugar Mills Ltd., the learned Single Judge of Bombay High Court has held that it was for the Assessee to place the material before the departmental authorities or the Tribunal to show that these monies on which the interest in dispute was earned were advanced in the course of the Assessee''s business or that the amounts advanced/lent there for short term deposits not for earning interest as such but for not keeping the money idle.

(ii) The second judgment relied upon by the learned counsel for the appellant is in the case of M/s Bharti Televentures Ltd., ( supra ) wherein the Division Bench of the Delhi High Court after relying on the judgment in the case of Kishan Prasad and Co. Ltd. Vs. Commissioner of Income Tax, Punjab, has quoted the following paras :

" 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 de-limiting 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"."

It is pertinent to note here that, in the case of M/s Bharti Televentures itself, in para 12, the Delhi High Court has further held that, "while it is true that the term "business" is of wide connotation, the true and applicable test in the opinion of that Court was articulated in Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, "

(iii) The last judgment relied upon by the learned counsel for the appellant Revenue Department is in the case of Collis Line Pvt. Ltd., ( supra) wherein the learned Single Judge of the Kerala High Court has observed that, "That investment, as found by the Commissioner, was only to secure the money which was lying idle. An income earned from that source is, therefore, not an income earned in the course of business so as to make it a part of the profits and gains of the assessees business. That is an income which has been found to be traceable to other sources". And, therefore, it was held by the Kerala High Court that the interest earned from such deposit was assessable as income from other sources and not as business income. On the facts of the said case, the Kerala High Court has held that the amount was deposited because money was lying idle and it was safer and wiser to put it in the bank. The interest thereby earned was incidental to the main purpose of the deposit, which was safe keeping and not earning profits. Therefore, it was held that such income was rightly found to be income from other sources.

Shri Naniwadekar, learned counsel appearing for the Respondent has relied upon the aforesaid five judgments in support of his contentions.

(i) In the case of Commissioner of Income Tax V/s Lok Holdings ( supra ), it has been held by the Division Bench of Bombay High Court in paras 7 and 8 of the said judgment that, the idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, the interest was earned on these amounts. In due course the assessee''s appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. The High Court has further held that in that case, admittedly, the assessee company was engaged in the construction business and had deposited money received in the course of such business with the bank, earning interest thereon and treated the said income as "business income" and temporarily invested the surplus amounts with banks and other concerns, and that the interest earned thereon is "business income" and cannot be assessed as "income from other sources".

(ii) Next judgment relied upon by the learned counsel appearing for the Respondent/Assessee is in the case of Radhasoami Satsang ( supra ) wherein the Supreme Court has adopted the Rule of Consistency and held that, in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of the exemption of the assessee appellant should not have been reopened. The Supreme Court has observed that the assessments are certainly quasi-judicial in nature and strictly speaking, res judicata does not apply to income tax proceedings. It was held that each assessment year being a unit, what is decided is one year may not apply in the following year but where a fundamental aspect permitting through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

(iii) In the case of Commissioner of Income Tax V/s Dalmia Promoters Developers P. Ltd., ( supra ), the Division Bench of Delhi High Court after relying on the judgment in the case of Radhasoami Satsang ( supra ) has held that for rejecting the view taken for the earlier assessment years, there must be a material change in the fact situation. There is no gainsaying that the previous view will have no applicable even in cases where the law itself has undergone a change but before an earlier view can be upset or digressed from, one of the two must be demonstrated, namely, a change in the fact situation or a material change in law whether enacted or declared by the Supreme Court. The Delhi High Court has therefore, held that the amount received from the co-developers and investments of such amount in fixed deposit is directly related to business activities and the interest income earned on deposits held to be the business income for earlier Assessment Years. The Revenue accepting the Appellate orders and there was no material change in facts in subsequent years, the view taken for earlier years would continue on principles of consistency.

(iv) Next judgment relied upon by Shri Naniwadekar is in the case of Commissioner of Income Tax Vs Tamil Nadu Dairy Development Corporation Ltd., ( supra ) wherein the Division Bench of Madras High Court has held that the interest accrued on short term deposits of the assessee -company which were made out of the business funds available with the assessee -company before the same were utilized for actual business and, and as such, the same is incidental to the business activity of the assessee- company and as such, the interest on the short term deposits should be treated as business income.

(v) The last judgment relied upon by the learned counsel appearing for the Respondent/Assessee is in the case of Commissioner of Income Tax V/s Paramount Premises (P) Ltd. (supra ), wherein the Division Bench of the Bombay High Court has held that " idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. The assessee was also required to give a guarantee to the State Bank in respect of the land taken on lease for construction work. For this purpose, certain amounts were kept in fixed deposits on which the assessee earned interest. In these circumstances, the Tribunal has given a finding of fact to the effect that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Accordingly, interest income was considered as the business income of the assessee.

Thus, after taking into consideration the settled legal position as enumerated from the aforesaid citations and as stated earlier, in the present case also as per the own findings of the Assessing Officer, the Assessee is utilizing deposits for giving security to the banks and opening Letters of Credit etc. As per the records, investing surplus funds in the call money market or short term deposit in favour of the banks for providing security for obtaining short term loans or as a deposit towards LC opening is one of the business activities of the Assessee and this had come for the scrutiny of the Tribunal for the Assessment Years 1967-68 to 1972- 1973 and it was held in favour of the Assessee that the interest income accrued therefrom is a business income. The record is very clear that there is no material to demonstrate the substantial change in the said view for years which were followed thereafter. It was after substantial consistent following of the said view, it appears that the Assessing Officer took a distinct and separate view thereby treating the interest income as income from other sources in the year 1991-92 and thereafter. The department has not established in any case that the said interest has been spent for any other purpose except the business purpose. The important aspect which is to be considered here is that the Respondent/Assessee is earning this interest income for last many years and it was always treated as business income. In view of the ratio laid down by the Supreme Court in the case of Radhasoami Satsang ( supra ) and by applying the said rule of consistency, we hold that, in the absence of any material change justifying the Department/Assessing Officer to take a different view from that taken in earlier proceedings, the question of the exemption of Respondent/Assessee should not have been reopened.

The Respondent/Assessee has utilized the surplus money for making investments in the bank deposits or call money market or inter-corporate deposits and it always retained its character as business assets. In our opinion the interest income earned by the Assessee has direct nexus with its business activity, as the said amounts were invested by the Respondent/Assessee for availing short term loans or for taking out LC opening. The object clauses of the Memorandum and Articles of Association particularly clauses (55) and (82) permit the company to lend, advance or deposit money as part of the business activity and the Assessee company carries out money market which is one of its business activities. Therefore, it can be safely said that the interest income earned by the Respondent/ Assessee is an earning out of its business activity only, as it has direct nexus with the said amount of business activity. The interest received by the Respondent/Assessee is having direct or proximate relationship with their main business activity and as such, the same has to be treated as "business income". As stated earlier, the money of the company was used for making investment in the bank deposits or call money market or inter-corporate deposits with the objective for availing short term loans or for keeping deposits for the purpose of LC''s and said money had always retained its character as business assets. In our opinion, the surplus money, unless and until it is pulled out totally from the business and having absolutely no nexus with the amount or ancillary business activity and thereby the same is deposited with the bank only and solely with a view of earning interest by keeping the said funds idle, then it can be treated as non- business income or income from the other sources.

In view of the facts of the present cases, we are of the opinion that the interest earned by the Respondent/Assessee is "business income" only and we hold that the Income Tax Appellate Tribunal has rightly held that the interest income earned by the Respondent/Assessee is a business income. The questions framed hereinabove are answered accordingly.

For the reasons stated herein above, in our considered opinion, there are no merits in these appeals and the appeals are hereby dismissed with no order as to costs.