Warren Tea Ltd. vs Commissioner of Income Tax and Others

The subject matter of this appeal is a judgment and order dated September 30, 2005, passed by the learned Income tax Appellate Tribunal dismissing an appeal preferred by the assessee and agreeing with the views of the Commissioner of Income-tax (Appeals) and the Assessing Officer that the interest earned by the assessee cannot be taken into account for the purpose of giving benefit under section 33AB. At all the stages inspiration was drawn from the judgment of the apex court in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, wherein their Lordships held that in extending the benefit under section 80HH income arising out of interest should not be taken into account. The aforesaid view was taken because the benefit under section 80HH was relatable to profits and gains derived from an industrial undertaking. Their Lordships were of the opinion that (page 280 of 262 ITR):

"The word ''derived'' has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC) when it said (page 328):

''The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of definition.''"

On behalf of the assessee, an analogy was sought to be drawn from section 80J which their Lordships distinguished by pointing out that in section 80J the language used was "attributable to". It was held that the expression "attributable to" is of wider import whereas the word "derived" has been interpreted to be of a narrower import.

Mr. Mazumder, learned advocate appearing for the appellant, submitted that at all the stages the authorities including the Tribunal relied upon the judgment in the case of Pandian Chemicals (supra) but they omitted to notice that the word "derived from" has consciously been not used in section 33AB. Therefore, there was no reason, according to him, why the meaning of the section should be ascertained by applying a judgment which is altogether on a different point. He drew our attention to a judgment of this court in the case of COMMISSIONER OF Income Tax Vs. TIRUPATI WOOLEN MILLS LTD., wherein the following view was taken (headnote):

"The Tribunal had found that the interest arose from utilization of commercial assets. The funds utilised in making fixed deposits with banks were business funds lying temporarily surplus with the assessee. It was, therefore, assessable as business income and revenue expenditure could be deducted from it."

He also drew our attention to a judgment in the case of Eveready Industries India Ltd. Vs. Commissioner of Income Tax and Another, wherein the following view was taken (headnote):

"that the main activity of the assessee was growing, manufacturing and selling of tea and not that of earning interest by investing in short-term fixed deposits. The assessee earned interest on such short-term deposits made out of the business funds available with the assessee before they were utilised for actual business and, therefore, it was incidental to the business activity of the assessee and interest on such short-term deposits must be treated as business income."

Mr. Mazumder submitted that the view taken by the learned Tribunal is palpably wrong and should be set aside.

Ms. Gutgutia, learned advocate besides relying upon the judgment in the case of Pandian Chemicals (supra) also drew our attention to a judgment of the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, , wherein the question was whether the loss arising out of payment of interest for the purpose of setting up the plant could be set Off against the income arising from interest which had been treated by the assessee itself as the income from other sources. This question was answered in the negative. Taking inspiration from this judgment she contended that the income arising out of interest has to be treated under the heading "Income from other sources" under sections 14 and 56 of the Income-tax Act, 1961. Section 33AB applies only to the business income and, therefore, the view taken by the Tribunal should not be interfered.

We have considered the rival submissions advanced by the learned advocates appearing before us. We are in agreement with the submissions advanced by Mr. Mazumder that the judgment in the case of Pandian Chemicals had no manner of application to the facts and circumstances of the case. When the matter was taken up on an earlier occasion we had requested Mr. Mazumder to produce before us a copy of the balance-sheet for the relevant year which he has produced today before us. From the balance-sheet, it appears that the assessee has, during the relevant year, paid or credited interest amounting to Rs. 2,62,21,000. The assessee has earned interest amounting to a sum of Rs. 1,85,63,000. It is not in dispute that the surplus commercial funds available with the company were kept in short-term fixed deposits. The company has borrowed funds for the purpose of carrying on its business. The funds may not always be necessary or may not always be blocked. Therefore, the funds which were surplus at any point of time were fruitfully invested in short-term fixed deposits and the assessee thus earned interest which in a way has reduced its burden on account of interest as would appear from the two figures indicated above. It is, therefore, not possible to hold that the interest earned was not a business income. When the assessee has paid interest of nearly Rs. 2.66 crores and has earned interest of nearly Rs. 1.88 crores, the effective debit on that side is less than Rs. 1 crore.

We are, as such, unable to see any reason why it can be said that the interest earned by the assessee should not be treated as the business income for the purpose of the benefit under section 33AB. The two judgments, cited by Mr. Majumdar, also support the contentions of the assessee. Another reason why the views expressed by the Tribunal cannot be accepted is that the benefit under section 33AB can be obtained provided the assessee has made the deposits with the national bank. Such deposits are not interest-free deposits. Interest also accrues from such deposits. If the intention of the Legislature was that income arising out of interest is to be excluded then a specific provision in that regard would have been made in the section itself. For the aforesaid reasons, the impugned judgment and order passed by the learned Tribunal is set aside. The questions framed above are answered in favour of the assessee and the appeal is allowed.