2005 (3) TMI 93 - HC - Income Tax

Deduction u/s 80HHC - interest derived from the borrowed funds - short-term deposits - Advertisement of the products - no logo of the assessee-company attached to the articles presented - Whether, the Tribunal was right in holding that interest received by the assessee on the surplus funds kept with banks as short-term deposits should be treated as business income? - Whether, the Tribunal was right in holding that presentations could not be considered to serve the purpose of advertisement of the products of the assessee when there was no logo of the assessee-company attached to the articles presented when rule 6B does not specify that presentation articles carrying the logo of the company only would be treated as serving the purpose of advertisement? HELD THAT - It is now a well-settled position in law that what is business income and what is not business income has to be determined on the facts of each case. In the instant case, the main activity of the assessee is export business and not that of earning interest on short-term fixed deposits. If the earning of interest is connected with the carrying on of the assessee's business and if the fixed deposits are utilised in such a manner so as to provide a sufficiently perceptible link with the business activities of the assessee, there should be no objection to the treatment of the interest as business income. In the instant case, the deposits in the bank were made with the money received as advance in the export business. The amount so deposited is the amount paid by the foreign buyer by way of advance amount to the assessee for the part performance of the agreement for export of the goods. The assessee, instead of keeping that amount idle, since it did not require the same for its immediate business activity, had deposited that amount by way of short-term deposit in the bank and the amount so deposited is only the funds which it had received towards the export to be made by it and the amounts so deposited in the bank and the interest income derived because of such deposit have close link with the business activity of the assessee-company and therefore, in our opinion, the first appellate authority and the Tribunal were justified in holding that the interest on bank deposits was assessable as business income. In the instant case, the Assessing Officer has disallowed the expenditure in respect of articles of presentation by applying rule 6B of the Rules. However, the first appellate authority and the Tribunal have found that since the articles neither bore the name of the company nor its logo, they cannot be considered as meant for advertisement. The object of the advertisement by a company is to attract customers by making them know the products manufactured by them and the advantages it has over and above that of similar products manufactured by the other companies. The first appellate authority and the Tribunal as a matter of fact have found that the articles distributed by the assessee-company did not even bear the name or the logo of the company and they did not even have any advertisement value. In view of this finding by both the fact-finding authorities, we are of the view that the assessing authority was not justified in disallowing the expenditure claimed by the assessee on presentation of articles to its customers and employees. In our view, the reliance placed by learned counsel Sri Seshachala on the decision of the apex court in the case of Smith Kline and French (India) Ltd. v. CIT 1996 (4) TMI 2 - SUPREME COURT , would not assist the Revenue in any manner. That was a case where the Supreme Court, apart from others, was considering the claim of the assessee with regard to deductibility or otherwise of surtax levied on the profits of a company is deductible u/s 40(a)(ii) of the Act. The conclusion of the court was that the liability to pay surtax is held to be not deductible as a business expenditure u/s 37 of the Act. In the result, the questions of law referred for our opinion require to be answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Reference proceedings are disposed of accordingly. Ordered accordingly.

Summary

Issues Involved:
1. Classification of interest income on surplus funds kept as short-term deposits.
2. Allowability of expenditure on presentation articles under Rule 6B of the Income-tax Rules, 1962.

Detailed Analysis:

1. Classification of Interest Income on Surplus Funds Kept as Short-Term Deposits

Facts:
The assessee, a private limited company engaged in the export of processed food items, received advance payments from foreign customers. These advances were kept in short-term deposits in banks, generating interest income. The assessee claimed this interest as business income, seeking deductions under Section 80HHC of the Income-tax Act, 1961.

Arguments:
- Revenue's Contention: The interest income should be classified as "income from other sources" as it lacks a direct nexus with the assessee's main business activity of export.
- Assessee's Contention: The interest income should be treated as business income since it was earned from surplus funds temporarily deposited, which is closely linked to the export business.

Tribunal's Findings:
The Tribunal held that the interest income arose during the course of the assessee's normal business activities and should be treated as business income, not "income from other sources."

Legal Precedents:
- Supreme Court in Narain Swadeshi Weaving Mills: Interest income assessable as business income if it is part of the business activities.
- Supreme Court in CIT v. Govinda Choudhury and Sons: Interest earned in a systematic and organized manner is assessable as business income.
- Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT: Interest derived from borrowed funds invested in short-term deposits before business commencement is "income from other sources."

Court's Analysis:
The court noted that the main activity of the assessee was export, and the deposits were made from advance payments received for exports. The interest income had a close link with the business activity and thus should be treated as business income.

Conclusion:
The interest income on surplus funds kept as short-term deposits is assessable as business income.

2. Allowability of Expenditure on Presentation Articles under Rule 6B of the Income-tax Rules, 1962

Facts:
The assessee claimed deductions for expenditures on presentation articles given to customers and employees. The Assessing Officer disallowed these under Rule 6B, which limits deductions for advertisement expenses.

Arguments:
- Revenue's Contention: The expenditure on presentation articles should be considered as advertisement expenses under Rule 6B, regardless of whether the articles bore the company's logo.
- Assessee's Contention: The articles did not bear the company's logo and were meant to maintain better relationships, not for advertisement purposes.

Tribunal's Findings:
The Tribunal found that the articles did not bear the company's name or logo and thus did not serve an advertisement purpose. The expenditure was for maintaining relationships and should not be disallowed under Rule 6B.

Legal Precedents:
- Supreme Court in Smith Kline and French (India) Ltd. v. CIT: Surtax is not deductible as business expenditure.
- Supreme Court in Eskayef v. CIT: Expenditure on free samples by pharmaceutical companies is for publicity and sales promotion.
- Allahabad High Court in CIT v. S. P. Textiles Co.: Expenditure on articles for selected purchasers not considered as publicity.
- Bombay High Court in CIT v. Allana Sons P. Ltd.: Presentation articles without the company's name or logo are not for advertisement.

Court's Analysis:
The court agreed with the Tribunal that since the articles did not bear the company's logo, they were not for advertisement. The expenditure was for maintaining relationships and did not fall under Rule 6B.

Conclusion:
The expenditure on presentation articles to customers and employees is allowable and does not fall under the restrictive provisions of Rule 6B.

Final Judgment:
The questions of law referred were answered in the affirmative, in favor of the assessee and against the Revenue. The reference proceedings were disposed of accordingly.